Regulatory Capital Rules: Implementation and Transition of the Current Expected Credit Losses Methodology for Allowances and Related Adjustments to the Regulatory Capital Rules and Conforming Amendments to Other Regulations, 22312-22339 [2018-08999]
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Federal Register / Vol. 83, No. 93 / Monday, May 14, 2018 / Proposed Rules
DEPARTMENT OF TREASURY
Office of the Comptroller of the
Currency
12 CFR Parts 1, 3, 5, 23, 24, 32, 34, and
46
[Docket ID OCC–2018–0009]
RIN 1557–AE32
FEDERAL RESERVE SYSTEM
12 CFR Parts 208, 211, 215, 217, 223,
225, and 252
[Regulation Q; Docket No. R–1605]
RIN 7100–AF04
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Parts 324, 325, 327, 347, and
390
RIN 3064–AE74
Regulatory Capital Rules:
Implementation and Transition of the
Current Expected Credit Losses
Methodology for Allowances and
Related Adjustments to the Regulatory
Capital Rules and Conforming
Amendments to Other Regulations
Office of the Comptroller of the
Currency (OCC), the Board of Governors
of the Federal Reserve System (Board),
and the Federal Deposit Insurance
Corporation (FDIC).
ACTION: Notice of proposed rulemaking.
AGENCY:
The Office of the Comptroller
of the Currency, the Board of Governors
of the Federal Reserve System, and the
Federal Deposit Insurance Corporation
(collectively, the agencies) are inviting
public comment on a joint proposal to
address changes to U.S. generally
accepted accounting principles (U.S.
GAAP) described in Accounting
Standards Update No. 2016–13, Topic
326, Financial Instruments—Credit
Losses (ASU 2016–13), including
banking organizations’ implementation
of the current expected credit losses
methodology. Specifically, the proposal
would revise the agencies’ regulatory
capital rules to identify which credit
loss allowances under the new
accounting standard are eligible for
inclusion in regulatory capital and to
provide banking organizations the
option to phase in the day-one adverse
effects on regulatory capital that may
result from the adoption of the new
accounting standard. The proposal also
would amend certain regulatory
disclosure requirements to reflect
applicable changes to U.S. GAAP
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SUMMARY:
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covered under ASU 2016–13. In
addition, the agencies are proposing to
make amendments to their stress testing
regulations so that covered banking
organizations that have adopted ASU
2016–13 would not include the effect of
ASU 2016–13 on their provisioning for
purposes of stress testing until the 2020
stress test cycle. Finally, the agencies
are proposing to make conforming
amendments to their other regulations
that reference credit loss allowances.
DATES: Comments must be received by
July 13, 2018.
ADDRESSES: Comments should be
directed to:
OCC: You may submit comments to
the OCC by any of the methods set forth
below. Commenters are encouraged to
submit comments through the Federal
eRulemaking Portal or email, if possible.
Please use the title ‘‘Regulatory Capital
Rules: Implementation and Transition of
the Current Expected Credit Losses
Methodology for Allowances and
Related Adjustments to the Regulatory
Capital Rules and Conforming
Amendments to Other Regulations’’ to
facilitate the organization and
distribution of the comments. You may
submit comments by any of the
following methods:
• Federal eRulemaking Portal—
‘‘Regulations.gov’’: Go to
www.regulations.gov. Enter ‘‘Docket ID
OCC–2018–0009’’ in the Search Box and
click ‘‘Search.’’ Click on ‘‘Comment
Now’’ to submit public comments.
• Click on the ‘‘Help’’ tab on the
Regulations.gov home page to get
information on using Regulations.gov,
including instructions for submitting
public comments.
• Email: regs.comments@
occ.treas.gov.
• Mail: Legislative and Regulatory
Activities Division, Office of the
Comptroller of the Currency, 400 7th
Street SW, suite 3E–218, Washington,
DC 20219.
• Hand Delivery/Courier: 400 7th
Street SW, suite 3E–218, Washington,
DC 20219.
• Fax: (571) 465–4326.
Instructions: You must include
‘‘OCC’’ as the agency name and ‘‘Docket
ID OCC–2018–0009’’ in your comment.
In general, the OCC will enter all
comments received into the docket and
publish them on the Regulations.gov
website without change, including any
business or personal information that
you provide such as name and address
information, email addresses, or phone
numbers. Comments received, including
attachments and other supporting
materials, are part of the public record
and subject to public disclosure. Do not
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include any information in your
comment or supporting materials that
you consider confidential or
inappropriate for public disclosure.
You may review comments and other
related materials that pertain to this
rulemaking action by any of the
following methods:
• Viewing Comments Electronically:
Go to www.regulations.gov. Enter
‘‘Docket ID OCC–2018–0009’’ in the
Search box and click ‘‘Search.’’ Click on
‘‘Open Docket Folder’’ on the right side
of the screen. Comments and supporting
materials can be viewed and filtered by
clicking on ‘‘View all documents and
comments in this docket’’ and then
using the filtering tools on the left side
of the screen.
• Click on the ‘‘Help’’ tab on the
Regulations.gov home page to get
information on using Regulations.gov.
The docket may be viewed after the
close of the comment period in the same
manner as during the comment period.
Viewing Comments Personally: You
may personally inspect comments at the
OCC, 400 7th Street SW, Washington,
DC 20219. For security reasons, the OCC
requires that visitors make an
appointment to inspect comments. You
may do so by calling (202) 649–6700 or,
for persons who are hearing impaired,
TTY, (202) 649–5597. Upon arrival,
visitors will be required to present valid
government-issued photo identification
and submit to security screening in
order to inspect comments.
Board: You may submit comments,
identified by Docket No. R–1605 and
RIN 7100–AF04, by any of the following
methods:
• Agency Website: https://
www.federalreserve.gov. Follow the
instructions for submitting comments at
https://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
• Email: regs.comments@
federalreserve.gov. Include docket
number in the subject line of the
message.
• Fax: (202) 452–3819 or (202) 452–
3102.
• Mail: Ann E. Misback, Secretary,
Board of Governors of the Federal
Reserve System, 20th Street and
Constitution Avenue NW, Washington,
DC 20551. All public comments are
available from the Board’s website at
https://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical
reasons or to remove sensitive PII at the
commenter’s request. Public comments
may also be viewed electronically or in
paper form in Room 3515, 1801 K Street
NW (between 18th and 19th Streets
NW), Washington, DC 20006 between
9:00 a.m. and 5:00 p.m. on weekdays.
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Federal Register / Vol. 83, No. 93 / Monday, May 14, 2018 / Proposed Rules
FDIC: You may submit comments,
identified by RIN 3064–AE74, by any of
the following methods:
• Agency Website: https://
www.fdic.gov/regulations/laws/federal/.
Follow instructions for submitting
comments on the Agency website.
• Mail: Robert E. Feldman, Executive
Secretary, Attention: Comments/Legal
ESS, Federal Deposit Insurance
Corporation, 550 17th Street NW,
Washington, DC 20429.
• Hand Delivery/Courier: Comments
may be hand-delivered to the guard
station at the rear of the 550 17th Street
Building (located on F Street) on
business days between 7:00 a.m. and
5:00 p.m.
• Email: comments@FDIC.gov.
Include RIN 3064–AE74 on the subject
line of the message.
• Public Inspection: All comments
received must include the agency name
and RIN 3064–AE74 for this rulemaking.
All comments received will be posted
without change to https://www.fdic.gov/
regulations/laws/federal/, including any
personal information provided. Paper
copies of public comments may be
ordered from the FDIC Public
Information Center, 3501 North Fairfax
Drive, Room E–1002, Arlington, VA
22226, or by telephone at (877) 275–
3342 or (703) 562–2200.
FOR FURTHER INFORMATION CONTACT:
OCC: Mark Ginsberg, Senior Risk
Expert, (202) 649–6983; or Kevin
Korzeniewski, Counsel, Legislative and
Regulatory Activities Division, (202)
649–5490; or for persons who are
hearing impaired, TTY, (202) 649–5597.
Board: Constance M. Horsley, Deputy
Associate Director, (202) 452–5239; Juan
Climent, Manager, (202) 872–7526;
Andrew Willis, Senior Supervisory
Financial Analyst, (202) 912–4323; or
Noah Cuttler, Senior Financial Analyst,
(202) 912–4678, Division of Supervision
and Regulation; or Benjamin W.
McDonough, Assistant General Counsel,
(202) 452–2036; David W. Alexander,
Counsel, (202) 452–2877; or Asad
Kudiya, Senior Attorney, (202) 475–
6358, Legal Division, Board of
Governors of the Federal Reserve
System, 20th and C Streets NW,
Washington, DC 20551. For the hearing
impaired only, Telecommunication
Device for the Deaf, (202) 263–4869.
FDIC: Benedetto Bosco, Chief,
bbosco@fdic.gov; David Riley, Senior
Policy Analyst, dariley@fdic.gov;
Richard Smith, Capital Markets Policy
Analyst, rsmith@fdic.gov; Michael
Maloney, Senior Policy Analyst,
mmaloney@fdic.gov; Capital Markets
Branch, Division of Risk Management
Supervision, regulatorycapital@fdic.gov,
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(202) 898–6888; or Michael Phillips,
Acting Supervisory Counsel, mphillips@
fdic.gov; Catherine Wood, Counsel,
cawood@fdic.gov; or Benjamin Klein,
Counsel, bklein@fdic.gov; Supervision
Branch, Legal Division, Federal Deposit
Insurance Corporation, 550 17th Street
NW, Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Overview of Changes to U.S. Generally
Accepted Accounting Principles
B. Regulatory Capital
II. Description of the Proposed Rule
A. Proposed Revisions to the Capital Rules
To Reflect the Change in U.S. GAAP
1. Introduction of Allowance for Credit
Losses as a Newly Defined Term
2. Definition of Carrying Value
i. Available-for-Sale Debt Securities
ii. Purchased Credit-Deteriorated Assets
3. Additional Considerations
B. CECL Transition Provision
1. Election of the Optional CECL Transition
Provision
2. Mechanics of the CECL Transition
Provision
3. CECL Transition Provision Time Period
4. Business Combinations
5. Supervisory Oversight
C. Additional Requirements for Advanced
Approaches Banking Organizations
D. Disclosures and Regulatory Reporting
E. Conforming Changes to Other Agency
Regulations
1. OCC Regulations
2. Board Regulations
3. FDIC Regulations
F. Additional Requests for Comments
III. Regulatory Analyses
A. Paperwork Reduction Act
B. Regulatory Flexibility Act
C. Plain Language
D. OCC Unfunded Mandates Reform Act of
1995
E. Riegle Community Development and
Regulatory Improvement Act of 1994
I. Background
A. Overview of Changes to U.S.
Generally Accepted Accounting
Principles
In June 2016, the Financial
Accounting Standards Board (FASB)
issued Accounting Standards Update
(ASU) No. 2016–13, Topic 326,
Financial Instruments—Credit Losses,1
which revises the accounting for credit
losses under U.S. generally accepted
accounting principles (U.S. GAAP).
ASU No. 2016–13 introduces the
current expected credit losses
1 ASU No. 2016–13 introduces ASC Topic 326
which covers measurement of credit losses on
financial instruments and includes three subtopics:
(i) Subtopic 10 Financial Instruments—Credit
Losses—Overall; (ii) Subtopic 20: Financial
Instruments—Credit Losses—Measured at
Amortized Cost; and (iii) Subtopic 30: Financial
Instruments—Credit Losses—Available-for-Sale
Debt Securities.
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methodology (CECL), which replaces
the incurred loss methodology for
financial assets measured at amortized
cost, and the term, purchased creditdeteriorated (PCD) assets, which
replaces the term, purchased creditimpaired (PCI) assets, and modifies the
treatment of credit losses on availablefor-sale (AFS) debt securities.
The new accounting standard for
credit losses will apply to all banking
organizations 2 that are subject to the
regulatory capital rules 3 (capital rules)
of the Office of the Comptroller of the
Currency (OCC), the Board of Governors
of the Federal Reserve System (Board),
and the Federal Deposit Insurance
Corporation (FDIC) (collectively, the
agencies), and that file regulatory
reports for which the reporting
requirements are required to conform to
U.S. GAAP.4
CECL differs from the incurred loss
methodology in several key respects.
First, CECL requires banking
organizations to recognize lifetime
expected credit losses for financial
assets measured at amortized cost, not
just those credit losses that have been
incurred as of the reporting date. CECL
also requires the incorporation of
reasonable and supportable forecasts in
developing an estimate of lifetime
expected credit losses, while
maintaining the current requirement for
banking organizations to consider past
events and current conditions.
Furthermore, the probable threshold for
recognition of allowances in accordance
with the incurred loss methodology is
removed under CECL. Taken together,
estimating expected credit losses over
the life of an asset under CECL,
including consideration of reasonable
and supportable forecasts but without
applying the probable threshold that
exists under the incurred loss
2 Banking organizations subject to the capital
rules include national banks, state member banks,
state nonmember banks, savings associations, and
top-tier bank holding companies and savings and
loan holding companies domiciled in the United
States not subject to the Board’s Small Bank
Holding Company Policy Statement (12 CFR part
225, appendix C), but exclude certain savings and
loan holding companies that are substantially
engaged in insurance underwriting or commercial
activities or that are estate trusts, and bank holding
companies and savings and loan holding companies
that are employee stock ownership plans.
3 12 CFR part 3 (OCC); 12 CFR part 217 (Board);
12 CFR part 324 (FDIC).
4 See 12 U.S.C. 1831n; see also Instructions for
Preparation of Consolidated Financial Statements
for Holding Companies, Reporting Form FR Y–9C
(Reissued March 2013); Instructions for Preparation
of Consolidated Reports of Condition and Income,
Reporting Forms FFIEC 031 and FFIEC 041 (last
update September 2017); Instructions for
Preparation of Consolidated Reports of Condition
and Income for a Bank with Domestic Offices Only
and Total Assets Less than $1 Billion, Reporting
Form FFIEC 051 (last update September 2017).
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methodology, results in earlier
recognition of credit losses.
In addition, CECL replaces multiple
impairment approaches in existing U.S.
GAAP. CECL allowances will cover a
broader range of financial assets than
allowance for loan and lease losses
(ALLL) under the incurred loss
methodology. Under the incurred loss
methodology, in general, ALLL covers
credit losses on loans held for
investment and lease financing
receivables, with additional allowances
for certain other extensions of credit and
allowances for credit losses on certain
off-balance sheet credit exposures (with
the latter allowances presented as a
liability).5 These exposures will be
within the scope of CECL. In addition,
CECL covers credit losses on held-tomaturity (HTM) debt securities. As
mentioned above, ASU No. 2016–13
also introduces PCD assets as a
replacement for PCI assets. The PCD
asset definition covers a broader range
of assets than the PCI asset definition.
CECL requires banking organizations to
estimate and record credit loss
allowances for a PCD asset at the time
of purchase. The credit loss allowance
is then added to the purchase price to
determine the amortized cost basis of
the asset for financial reporting
purposes. Post-acquisition increases in
credit loss allowances on PCD assets
will be established through a charge to
earnings. This is different from the
current treatment of PCI assets, for
which banking organizations are not
permitted to estimate and recognize
credit loss allowances at the time of
purchase. Rather, in general, credit loss
allowances for PCI assets are estimated
subsequent to the purchase only if there
is deterioration in the expected cash
flows from the assets.
ASU No. 2016–13 also introduces
new requirements for AFS debt
securities. The new accounting standard
requires that a banking organization
recognize credit losses on individual
AFS debt securities through credit loss
allowances, rather than through direct
write-downs, as is currently required
under U.S. GAAP. AFS debt securities
will continue to be measured at fair
value, with changes in fair value not
related to credit losses recognized in
other comprehensive income. Credit
loss allowances on an AFS debt security
are limited to the amount by which the
security’s fair value is less than its
amortized cost.
Upon adoption of CECL, a banking
organization will record a one-time
adjustment to its credit loss allowances
as of the beginning of its fiscal year of
adoption equal to the difference, if any,
between the amount of credit loss
allowances required under the incurred
loss methodology and the amount of
credit loss allowances required under
CECL. Except for PCD assets, the
adjustment to credit loss allowances
would be recognized with offsetting
entries to deferred tax assets (DTAs), if
appropriate, and to the fiscal year’s
beginning retained earnings.
The effective date of ASU No. 2016–
13 varies for different banking
organizations. For banking organizations
that are U.S. Securities and Exchange
Commission (SEC) filers,6 ASU No.
2016–13 will become effective for the
first fiscal year beginning after
December 15, 2019, including interim
periods within that fiscal year. For
banking organizations that are public
business entities (PBE) 7 but not SEC
filers (as defined in U.S. GAAP), ASU
No. 2016–13 will become effective for
the first fiscal year beginning after
December 15, 2020, including interim
periods within that fiscal year. For
banking organizations that are not PBEs
(as defined in U.S. GAAP), ASU No.
2016–13 will become effective for the
first fiscal year beginning after
December 15, 2020; however, these
banking organizations will not be
required to adopt ASU No. 2016–13 for
interim period reporting until the first
fiscal year that begins after December
15, 2021. A banking organization that
chooses to apply ASU No. 2016–13
early may do so in the first fiscal year
beginning after December 15, 2018,
including interim periods. The
following table provides a summary of
the effective dates.
CECL EFFECTIVE DATES
Regulatory report
effective date *
U.S. GAAP effective date
PBEs that are SEC Filers ...............
Other PBEs (Non-SEC Filers) ........
Non-PBEs ........................................
Early Application .............................
Fiscal years beginning after 12/15/2019, including interim periods
within those fiscal years.
Fiscal years beginning after 12/15/2020, including interim periods
within those fiscal years.
Fiscal years beginning after 12/15/2020, and interim periods for fiscal
years beginning after 12/15/2021.
Early application permitted for fiscal years beginning after 12/15/
2018, including interim periods within those fiscal years.
3/31/2020.
3/31/2021.
12/31/2021.
3/31 of year of effective date of
early application of ASU 2016–
13.
* For institutions with calendar year-ends.
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B. Regulatory Capital
Changes necessitated by CECL to a
banking organization’s retained
earnings, DTAs, and allowances will
affect its regulatory capital ratios.8
Specifically, retained earnings are a key
component of a banking organization’s
common equity tier 1 (CET1) capital. An
increase in a banking organization’s
5 ‘‘Other extensions of credit’’ includes trade and
reinsurance receivables, and receivables that relate
to repurchase agreements and securities lending
agreements. ‘‘Off-balance sheet credit exposures’’
includes off-balance sheet credit exposures not
accounted for as insurance, such as loan
commitments, standby letters of credit, and
financial guarantees. The agencies note that credit
losses for off-balance sheet credit exposures that are
unconditionally cancellable by the issuer are not
recognized under CECL.
6 An SEC filer is an entity (e.g., a bank holding
company or savings and loan holding company)
that is required to file its financial statements with
the SEC under the federal securities laws or, for an
insured depository institution, the appropriate
federal banking agency under section 12(i) of the
Securities Exchange Act of 1934. The banking
agencies named under section 12(i) of the Securities
Exchange Act of 1934 are the OCC, the Board, and
the FDIC.
7 A public business entity (PBE) that is not an SEC
filer would include: (1) An entity that has issued
securities that are traded, listed, or quoted on an
over-the-counter market, or (2) an entity that has
issued one or more securities that are not subject
to contractual restrictions on transfer and is
required by law, contract, or regulation to prepare
U.S. GAAP financial statements (including
footnotes) and make them publicly available
periodically (e.g., pursuant to Section 36 of the
Federal Deposit Insurance Act and part 363 of the
FDIC’s rules). For further information on the
definition of a PBE, refer to ASU No. 2013–12,
Definition of a Public Business Entity, issued in
December 2013.
8 12 CFR 3.20 (OCC); 12 CFR 217.20 (Board); 12
CFR 324.20 (FDIC).
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allowances, including those estimated
under CECL, generally will reduce the
banking organization’s earnings or
retained earnings, and therefore its
CET1 capital.9 DTAs arising from
temporary differences (temporary
difference DTAs) must be included in a
banking organization’s risk-weighted
assets or deducted from CET1 capital if
they exceed certain thresholds.
Increases in allowances generally give
rise to increases in temporary difference
DTAs that will partially offset the
reduction in earnings or retained
earnings.10 Under the standardized
approach of the capital rules, ALLL is
included in a banking organization’s tier
2 capital up to 1.25 percent of its
standardized total risk-weighted assets
(excluding its standardized market riskweighted assets, if applicable).11 An
advanced approaches banking
organization 12 that has completed the
parallel run process 13 includes in its
advanced-approaches-adjusted total
capital any eligible credit reserves that
exceed the banking organization’s total
expected credit losses, as defined in the
capital rules, to the extent that the
excess reserve amount does not exceed
0.6 percent of the banking organization’s
credit risk-weighted assets.14
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II. Description of the Proposed Rule
To address the forthcoming
implementation of changes to U.S.
GAAP resulting from the FASB’s
issuance of ASU No. 2016–13 and to
improve consistency between the
capital rules and U.S. GAAP, the
agencies propose to amend their capital
9 However, allowances recognized on PCD assets
upon adoption of CECL and upon later purchases
of PCD assets generally would not reduce the
banking organization’s earnings, retained earnings,
or CET1 capital.
10 Deferred tax assets are a result of deductible
temporary differences and carryforwards which
result in a decrease in taxes payable in future years.
11 Any amount of ALLL greater than the 1.25
percent limit is deducted from standardized total
risk-weighted assets.
12 A banking organization is an advanced
approaches banking organization if it has
consolidated assets of at least $250 billion or if it
has consolidated on-balance sheet foreign
exposures of at least $10 billion, or if it is a
subsidiary of a depository institution, bank holding
company, savings and loan holding company, or
intermediate holding company that is an advanced
approaches banking organization. See 12 CFR 3.100
(OCC); 12 CFR 217.100 (Board); 12 CFR 324.100
(FDIC).
13 An advanced approaches banking organization
is considered to have completed the parallel run
process once it has completed the advanced
approaches qualification process and received
notification from its primary federal regulator
pursuant to section 121(d) of subpart E of the
capital rules. See 12 CFR 3.121(d) (OCC); 12 CFR
217.121(d) (Board); 12 CFR 324.121(d) (FDIC).
14 12 CFR 3.10(c)(3)(ii) (OCC); 12 CFR
217.10(c)(3)(ii) (Board); and 12 CFR 324.10(c)(3)(ii)
(FDIC).
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rules to identify which credit loss
allowances under the new accounting
standard are eligible for inclusion in a
banking organization’s regulatory
capital.15 In particular, the agencies are
proposing to add allowance for credit
losses (ACL) as a newly defined term in
the capital rules. ACL would include
credit loss allowances related to
financial assets measured at amortized
cost, except for allowances for PCD
assets. ACL would be eligible for
inclusion in a banking organization’s
tier 2 capital subject to the current limit
for including ALLL in tier 2 capital
under the capital rules.
Further, the agencies are proposing to
revise the capital rules, as applicable to
an advanced approaches banking
organization that has adopted CECL,
and that has completed the parallel run
process, to align the definition of
eligible credit reserves with the
definition of ACL in this proposal. For
such a banking organization, the
proposal would retain the current limit
for including eligible credit reserves in
tier 2 capital.
The proposal also would provide a
separate capital treatment for
allowances associated with AFS debt
securities and PCD assets that would
apply to all banking organizations upon
adoption of ASU 2016–13.
In addition, the agencies are
proposing to provide banking
organizations the option to phase in the
day-one adverse regulatory capital
effects of CECL adoption over a threeyear period (CECL transition provision).
The CECL transition provision is
intended to address banking
organizations’ challenges in capital
planning for CECL implementation,
including the uncertainty of economic
conditions at the time a banking
organization adopts CECL.
The proposed rule also would revise
regulatory disclosure requirements that
would apply to certain banking
organizations following their adoption
of CECL.16 Revisions to the agencies’
regulatory reports will be proposed in a
separate notice. Finally, the proposed
rule would make conforming
amendments to the agencies’ other
regulations that refer to credit loss
15 Note that under section 37 of the Federal
Deposit Insurance Act, the accounting principles
applicable to reports or statements required to be
filed with the agencies by all insured depository
institutions must be uniform and consistent with
GAAP. See 12 U.S.C. 1831n(a)(2)(A). Consistency in
reporting under the statute would be addressed by
the agencies’ CECL revisions to the Call Report
pursuant to the Paperwork Reduction Act.
16 For certain banking organizations, sections 63
and 173 of the capital rules require disclosure of
items such as capital structure, capital adequacy,
credit risk, and credit risk mitigation.
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allowances to reflect the
implementation of ASU No. 2016–13.
A. Proposed Revisions to the Capital
Rules To Reflect the Change in U.S.
GAAP
1. Introduction of Allowances for Credit
Losses as a Newly Defined Term
The agencies are proposing to revise
the capital rules to reflect the revised
accounting standard for credit losses
under U.S. GAAP as it relates to banking
organizations’ calculation of regulatory
capital ratios. Under the proposal, the
new term ACL, rather than ALLL, would
apply to a banking organization that has
adopted CECL. Consistent with the
treatment of ALLL under the capital
rules’ standardized approach, amounts
of ACL would be eligible for inclusion
in a banking organization’s tier 2 capital
up to 1.25 percent of the banking
organization’s standardized total riskweighted assets (excluding its
standardized market risk-weighted
assets, if applicable).
CECL allowances cover a broader
range of financial assets than ALLL
under the incurred loss methodology.
Under the capital rules, ALLL includes
valuation allowances that have been
established through a charge against
earnings to cover estimated credit losses
on loans or other extensions of credit as
determined in accordance with U.S.
GAAP. Under CECL, credit loss
allowances represent an accounting
valuation account, measured as the
difference between the financial assets’
amortized cost basis and the amount
expected to be collected on the financial
assets (i.e., lifetime credit losses). Thus,
ACL would include allowances for
expected credit losses on HTM debt
securities and lessors’ net investments
in leases that have been established to
reduce these assets to amounts expected
to be collected, as determined in
accordance with U.S. GAAP. ACL also
would include allowances for expected
credit losses on off-balance sheet credit
exposures not accounted for as
insurance, as determined in accordance
with U.S. GAAP. As described below,
however, credit loss allowances related
to AFS debt securities and PCD assets
would not be included in the definition
of ACL. As with the treatment of ALLL,
ACL under the proposal also would
exclude allocated transfer risk reserves.
Question 1: The agencies request
comment on whether use of the term
‘‘allowance for credit losses’’ within the
capital rules would present operational
or other challenges, or generally cause
confusion for banking organizations,
given other contextual uses for the term,
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particularly in U.S. GAAP and
accounting guidance.
2. Definition of Carrying Value
The agencies are proposing to revise
the regulatory definition of carrying
value under the capital rules to provide
that, for all assets other than AFS debt
securities and PCD assets, the carrying
value is not reduced by any associated
credit loss allowance.
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i. Available-for-Sale Debt Securities
Current accounting standards require
a banking organization to make an
individual assessment of each of its AFS
debt securities and take a direct writedown for credit losses when such a
security is other-than-temporarily
impaired. The amount of the writedown is against earnings, which reduces
CET1 capital and also results in a
reduction in the same amount of the
carrying value of the AFS debt security.
ASU No. 2016–13 revises the
accounting for credit impairment of AFS
debt securities by requiring banking
organizations to determine whether a
decline in fair value below an AFS debt
security’s amortized cost resulted from
a credit loss, and to record any such
credit impairment through earnings
with a corresponding allowance. Similar
to the current regulatory treatment of
credit-related losses for other-thantemporary impairment, under the
proposal all credit losses recognized on
AFS debt securities would flow through
to CET1 capital and reduce the carrying
value of the AFS debt security. Since
the carrying value of an AFS debt
security is its fair value, which would
reflect any credit impairment, credit
loss allowances for AFS debt securities
required under the new accounting
standard would not be eligible for
inclusion in a banking organization’s
tier 2 capital.
ii. Purchased Credit-Deteriorated Assets
Under the new accounting standard,
PCD assets are acquired individual
financial assets (or acquired groups of
financial assets with shared risk
characteristics) that, as of the date of
acquisition and as determined by an
acquirer’s assessment, have experienced
a more-than-insignificant deterioration
in credit quality since origination. The
new accounting standard will require a
banking organization to estimate
expected credit losses that are
embedded in the purchase price of a
PCD asset and recognize these amounts
as an allowance as of the date of
acquisition. As such, the initial
allowance amount for a PCD asset
recorded on a banking organization’s
balance sheet will not be established
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through a charge to earnings. Postacquisition increases in allowances for
PCD assets will be established through
a charge against earnings.
Including in tier 2 capital allowances
that have not been charged against
earnings would diminish the quality of
regulatory capital. Accordingly, the
agencies are proposing to maintain the
requirement that valuation allowances
be charged against earnings in order to
be eligible for inclusion in tier 2 capital.
The agencies also are clarifying that
valuation allowances that are charged to
retained earnings in accordance with
U.S. GAAP (i.e., the allowances required
at CECL adoption) are eligible for
inclusion in tier 2 capital. The agencies
considered proposing to allow banking
organizations to bifurcate PCD
allowances to include only postacquisition allowances in the definition
of ACL. The agencies are concerned,
however, that a bifurcated approach
could create undue complexity and
burden for banking organizations when
determining the amount of credit loss
allowances for PCD assets eligible for
inclusion in tier 2 capital. Therefore, the
proposal excludes PCD allowances from
being included in tier 2 capital. The
proposal also revises the definition of
carrying value such that for PCD assets
the carrying value is calculated net of
allowances. This treatment of PCD
assets would, in effect, reduce a banking
organization’s standardized total riskweighted assets, similar to the proposed
treatment for credit loss allowances for
AFS debt securities.
Question 2: The agencies are
requesting comment on whether the
definition of ACL is appropriate for
determining the amount of allowances
that may be included in a banking
organization’s tier 2 capital and whether
the approach to AFS debt securities and
PCD assets is appropriate. What, if any,
alternatives with respect to the
treatment of ACL, AFS debt securities,
and PCD assets should the agencies
consider and what are the associated
advantages and disadvantages of such
alternatives?
3. Additional Considerations
The agencies are not proposing to
change the limit of 1.25 percent of riskweighted assets governing the amount of
ACL eligible for inclusion in tier 2
capital. The agencies intend to monitor
the effects of this limit on regulatory
capital and bank lending practices. This
ongoing monitoring will include the
review of data, including data provided
by banking organizations, and will assist
the agencies in determining whether a
further change to the capital rules’
treatment of ACL might be warranted.
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To the extent the agencies determine
that further revisions to the capital rules
are necessary, the agencies would seek
comment through a separate proposal.
B. CECL Transition Provision
As discussed above, upon adopting
CECL, a banking organization will
record an adjustment to its credit loss
allowances equal to the difference
between the amount of credit loss
allowances required under the incurred
loss methodology and the amount of
credit loss allowances required under
CECL. Some banking organizations have
expressed concerns about the difficulty
in capital planning due to the
uncertainty about the economic
environment at the time of CECL
adoption. This is largely because CECL
requires banking organizations to
consider current and future expected
economic conditions to estimate
allowances and these conditions will
not be known until closer to a banking
organization’s CECL adoption date.
Therefore, it is possible that despite
adequate planning to prepare for the
implementation of CECL, unexpected
economic conditions at the time of
CECL adoption could result in higherthan-anticipated increases in
allowances. To address these concerns,
the agencies are proposing to provide a
banking organization with the option to
phase in over a three-year period the
day-one adverse effects of CECL on the
banking organization’s regulatory
capital ratios.
1. Election of the Optional CECL
Transition Provision
Under the proposal, a banking
organization that experiences a
reduction in retained earnings as of the
CECL adoption date may elect to phase
in the regulatory capital impact of
adopting CECL over a three-year
transition period (electing banking
organization). An electing banking
organization would be required to begin
applying the CECL transition provision
as of the electing banking organization’s
CECL adoption date. An electing
banking organization would indicate in
its regulatory report its election to use
the CECL transition provision beginning
in the quarter that it first reports its
credit loss allowances as measured
under CECL.17
A banking organization that does not
elect to use the CECL transition
provision in the quarter that it first
17 An insured depository institution would
indicate its election to use the CECL transition
provision on its Consolidated Reports of Condition
and Income. A holding company would indicate its
election to use the CECL transition provision on its
FR Y–9C.
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reports its credit loss allowances as
measured under CECL would not be
permitted to make an election in
subsequent reporting periods and would
be required to reflect the full effect of
CECL in its regulatory capital ratios as
of the banking organization’s CECL
adoption date. For example, a banking
organization that adopts CECL as of
January 1, 2020, and does not elect to
use the CECL transition provision in its
regulatory report as of March 31, 2020,
would not be permitted to use the CECL
transition provision in any subsequent
reporting period.
A banking organization that is a nonPBE must adopt CECL no later than for
fiscal years beginning after December
15, 2020, and for interim periods for
fiscal years beginning after December
15, 2021. As a result, unless it chooses
to adopt CECL as of an earlier date, such
a banking organization with a calendar
fiscal year will initially reflect CECL in
its regulatory report filed as of
December 31, 2021, even though CECL
was effective for that banking
organization as of the first day of the
fiscal year. Such a banking
organization’s regulatory capital would
not be affected by CECL during the first
three reporting periods of 2021 and
therefore the banking organization
would initially be eligible to elect the
CECL transition provision in its
December 31, 2021 regulatory report.
The second year of the transition period
would begin in the banking
organization’s March 31, 2022
regulatory report.
Under the proposed rule, a depository
institution holding company subject to
the Board’s capital rule and each of its
subsidiary insured depository
institutions would be eligible to make a
CECL transition provision election
independent of one another.
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2. Mechanics of the CECL Transition
Provision
The CECL transition provision is
designed to phase in the day-one
adverse impact on a banking
organization’s regulatory capital ratios
resulting from its adoption of CECL. To
calculate its transitional amounts under
the CECL transition provision, an
electing banking organization would
compare the difference between its
closing balance sheet amount for the
fiscal year-end immediately prior to its
adoption of CECL (pre-CECL amount)
and its balance sheet amount as of the
beginning of the fiscal year in which the
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electing banking organization adopts
CECL (post-CECL amount) for the
following items: Retained earnings,
temporary difference DTAs, and credit
loss allowances eligible for inclusion in
regulatory capital. The differences
determined for each of these items
would constitute the transitional
amounts that an electing banking
organization would phase in to its
regulatory capital calculations over the
proposed transition period, which
would be the three-year period (twelve
quarters) beginning the first day of the
fiscal year in which the electing banking
organization adopts CECL.
Specifically, under the proposed rule,
an electing banking organization’s CECL
transitional amount would be
determined as the difference between its
pre-CECL and post-CECL amounts of
retained earnings (CECL transitional
amount). An electing banking
organization’s DTA transitional amount
would be determined as the difference
between its pre-CECL and post-CECL
amounts of temporary difference DTAs
(DTA transitional amount). An electing
banking organization’s ACL transitional
amount would be determined as the
difference between its pre-CECL amount
of ALLL and its post-CECL amount of
ACL (ACL transitional amount).
Under the standardized approach, an
electing banking organization would
phase in over the transition period its
CECL transitional amount, DTA
transitional amount, and ACL
transitional amount. The electing
banking organization also would phase
in over the transition period the CECL
transitional amount to its average total
consolidated assets for purposes of
calculating the tier 1 leverage ratio. Each
transitional amount would be phased in
over the transition period on a straight
line basis.
Thus, for regulatory capital ratio
calculation purposes, an electing
banking organization would phase in
the CECL transitional amount by
increasing its retained earnings by 75
percent of its CECL transitional amount
during the first year of the transition
period, by 50 percent of its CECL
transitional amount during the second
year of the transition period, and by 25
percent of its CECL transitional amount
during the third year of the transition
period. The electing banking
organization would phase in the DTA
transitional amount by decreasing the
amount of its temporary difference
DTAs by 75 percent of its DTA
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22317
transitional amount during the first year
of the transition period, by 50 percent
of its DTA transitional amount during
the second year of the transition period,
and by 25 percent of its DTA
transitional amount during the third
year of the transition period. The
banking organization would phase in
the ACL transitional amount by
decreasing the amount of its ACL by 75
percent of its ACL transitional amount
during the first year of the transition
period, by 50 percent of its ACL
transitional amount during the second
year of the transition period, and by 25
percent of its ACL transitional amount
during the third year of the transition
period. Finally, for regulatory capital
ratio calculation purposes, the electing
banking organization would increase the
amount of its average total consolidated
assets by its CECL transitional amount
over the transition period on the same
straight line basis (i.e., increasing
average total consolidated assets by 75
percent of the CECL transitional amount
during year 1, by 50 percent during year
2, and by 25 percent during year 3 of the
transition period).
For example, consider a hypothetical
electing banking organization that has a
CECL effective date of January 1, 2020,
and a 21 percent tax rate. On the closing
balance sheet date immediately prior to
adopting CECL (i.e., December 31,
2019), the electing banking organization
has $10 million in retained earnings and
$1 million of ALLL. On the opening
balance sheet date immediately after
adopting CECL (i.e., January 1, 2020),
the electing banking organization has
$1.2 million of ACL. The electing
banking organization would recognize
the adoption of CECL by recording an
increase to ACL (credit) of $200,000,
with an offsetting increase in temporary
difference DTAs of $42,000 (debit), and
a reduction in beginning retained
earnings of $158,000 (debit). For each of
the quarterly reporting periods in year 1
of the transition period (i.e., 2020), the
electing banking organization would
increase both retained earnings and
average total consolidated assets by
$118,500 ($158,000 x 75 percent),
decrease temporary difference DTAs by
$31,500 ($42,000 × 75 percent), and
decrease ACL by $150,000 ($200,000 ×
75 percent) for purposes of calculating
its regulatory capital ratios. The
remainder of the CECL transition
provision would be transitioned into
regulatory capital according to the
schedule provided in Table 1.
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TABLE 1—EXAMPLE OF A CECL TRANSITION PROVISION SCHEDULE
Transitional
amounts
In thousands
Transitional amounts applicable during each
year of the transition period
Column A
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The result of the CECL transition
provision for an electing banking
organization would be to phase in the
effect of the adoption of CECL in its
regulatory capital ratios in a uniform
manner. The phase in of the CECL
transitional amount to retained earnings
would mitigate the decrease in an
electing banking organization’s CET1
capital resulting from CECL adoption,
and would increase during the
transition period the level at which the
capital rule’s CET1 capital deduction
thresholds would be triggered. The DTA
transitional amount would phase in the
amount of an electing banking
organization’s temporary difference
DTAs subject to the CET1 capital
deduction thresholds and the amount of
temporary difference DTAs included in
risk-weighted assets. The ACL
transitional amount would phase in the
amount of ACL that an electing banking
organization may include in its tier 2
capital up to the limit of 1.25 percent of
its standardized total risk-weighted
assets (excluding its standardized
market risk-weighted assets, if
applicable). Finally, for purposes of an
electing banking organization’s tier 1
leverage ratio calculation, the addition
of the CECL transitional amount to
average total consolidated assets would
offset the immediate decrease that
would otherwise occur as a result of the
adjustments to ACL and temporary
difference DTAs resulting from the
adoption of CECL.
Notwithstanding the CECL transition
provision, all other aspects of the capital
rules would continue to apply. Thus, all
regulatory capital adjustments and
deductions would continue to apply
and an electing banking organization
would continue to be limited in the
amount of ACL that it could include in
its tier 2 capital.18
Question 3: The agencies seek
comment on other potential approaches
to phasing in the day-one effects of
18 12 CFR 3.10(c)(3)(ii)(B), 12 CFR 3.20(d)(3)
(OCC); 12 CFR 217.10(c)(3)(ii)(B), 12 CFR
217.20(d)(3) (Board); 12 CFR 324.10(c)(3)(ii)(B), 12
CFR 324.20(d)(3) (FDIC).
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Column C
Column D
Year 1 at 75%
Increase retained earnings and average total consolidated assets by the
CECL transitional amount ............................................................................
Decrease temporary difference DTAs by the DTA transitional amount ..........
Decrease ACL by the ACL transitional amount ..............................................
Column B
Year 2 at 50%
Year 3 at 25%
$118.50
31.50
150
$79
21
100
$39.50
10.50
50
$158
42
200
CECL on banking organizations’
regulatory capital ratios. What are the
pros and cons of such alternative
approaches?
3. CECL Transition Provision Time
Period
As noted, the agencies are proposing
a phase-in period of three years. ASU
No. 2016–13 was issued in 2016 and
becomes mandatory in 2020 at the
earliest, which provides banking
organizations with at least four years to
plan for CECL implementation. While
the agencies recognize that a banking
organization will better understand the
macroeconomic factors that may affect
the size of the banking organization’s
one-time adjustment to CECL closer to
its CECL adoption date, the agencies
view a period of four years to plan for
CECL, combined with the proposed
three-year transition period, as a
sufficient amount of time for a banking
organization to adjust and adapt to any
immediate adverse effects on regulatory
capital ratios resulting from CECL
adoption.
Question 4: The agencies seek
comment on the sufficiency of the
proposed three-year transition period.
Would a different time period be more
appropriate? If so, why?
4. Business Combinations
Under the proposal, an electing
banking organization that acquires
another banking organization (as
determined under U.S. GAAP) during
the period in which the electing banking
organization is using its CECL transition
provision would continue to make use
of its transitional amounts based on its
calculation as of the date of its adoption
of CECL. Business combinations would
cover mergers, acquisitions, and
transactions in which two existing
unrelated entities combine into a newly
created third entity. However, any CECL
transitional amounts, DTA transitional
amounts, and ACL transitional amounts
of an acquired electing banking
organization would not flow through to
the resulting banking organization as the
assets of an acquired banking
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organization are generally measured at
fair value at the time of the business
combination.
Question 5: The agencies seek
comment on the proposed treatment of
business combinations and other
potential approaches to treating
business combinations within the
context of the CECL transition provision.
What are the pros and cons of such
alternative approaches?
5. Supervisory Oversight
For purposes of determining whether
an electing banking organization is in
compliance with its regulatory capital
requirements (including capital buffer
and prompt corrective action (PCA)
requirements), the agencies would use
the electing banking organization’s
regulatory capital ratios as adjusted by
the CECL transition provision. Through
the supervisory process, the agencies
would continue to examine banking
organizations’ credit loss estimates and
allowance balances regardless of
whether the banking organization has
elected to use the CECL transition
provision. In addition, the agencies may
monitor electing banking organizations
to ensure that such banking
organizations have adequate capital at
the expiration of their CECL transition
provision period.
C. Additional Requirements for
Advanced Approaches Banking
Organizations
Under the capital rules, an advanced
approaches banking organization that
has completed the parallel run process
includes in its advanced-approachesadjusted total capital any amount of
eligible credit reserves that exceeds its
regulatory expected credit losses to the
extent that the excess reserve amount
does not exceed 0.6 percent of the
banking organization’s credit riskweighted assets.19 The agencies propose
to revise the definition of eligible credit
reserves to align with the definition of
19 12 CFR 3.10(c)(3)(ii) (OCC); 12 CFR
217.10(c)(3)(ii) (Board); and 12 CFR 324.10(c)(3)(ii)
(FDIC).
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ACL in this proposal. Under the
proposal, for an advanced approaches
banking organization that has adopted
CECL, eligible credit reserves would
mean all general allowances that have
been established through a charge
against earnings or retained earnings to
cover expected credit losses associated
with on- or off-balance sheet wholesale
and retail exposures, including ACL
associated with such exposures. Similar
to the current definition of eligible
credit reserves, the definition of eligible
credit reserves applicable to banking
organizations that have adopted CECL
would exclude allocated transfer risk
reserves established pursuant to 12
U.S.C. 3904. In addition, the revised
eligible credit reserves definition would
exclude allowances that reflect credit
losses on PCD assets and AFS debt
securities, and other specific reserves
created against recognized losses. The
definition of eligible credit reserves
would remain unchanged for an
advanced approaches banking
organization that has not adopted CECL.
For purposes of the supplementary
leverage ratio, which is applicable to all
advanced approaches banking
organizations, the proposal would
maintain the current definition of total
leverage exposure. Thus, total leverage
exposure would continue to include,
among other items, the balance sheet
carrying value of an advanced
approaches banking organization’s onbalance sheet assets less amounts
deducted from tier 1 capital.
An advanced approaches banking
organization that elects to use the CECL
transition provision (electing advanced
approaches banking organization)
would increase its total leverage
exposure for purposes of the
supplementary leverage ratio by 75
percent of its CECL transitional amount
during the first year of the transition
period, increase its total leverage
exposure for purposes of the
supplementary leverage ratio by 50
percent of its CECL transitional amount
during the second year of the transition
period, and increase its total leverage
exposure for purposes of the
supplementary leverage ratio by 25
percent of its CECL transitional amount
during the third year of the transition
period.
In addition, an electing advanced
approaches banking organization that
has completed the parallel run process
would calculate an additional
transitional amount to be phased into its
eligible credit reserves (eligible credit
reserves transitional amount). The
eligible credit reserves transitional
amount would mean the increase in the
amount of an advanced approaches
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banking organization’s eligible credit
reserves as of the beginning of the fiscal
year in which the banking organization
adopts CECL from the amount of that
banking organization’s eligible credit
reserves as of the closing of the fiscal
year-end immediately prior to the
banking organization’s adoption of
CECL. An electing advanced approaches
banking organization would decrease
the amount of its eligible credit reserves
by its eligible credit reserves transitional
amount over the transition period on a
straight line basis (i.e., decreasing
eligible credit reserves by 75 percent
during year 1, by 50 percent during year
2, and by 25 percent during year 3).
An advanced approaches banking
organization that has completed the
parallel run process is required to
deduct from CET1 capital the amount of
expected credit loss that exceeds its
eligible credit reserves (ECR shortfall).
Due to this requirement, an advanced
approaches banking organization’s CET1
capital immediately after CECL
adoption may be greater than its CET1
capital immediately before CECL
adoption.20 This is because, for such
banking organizations, CECL allowances
can have a dual impact on CET1 capital:
A reduction in retained earnings
(partially offset by DTAs) and a
concurrent reduction in the CET1 ECR
shortfall deduction. The agencies are
concerned that the use of the CECL
transition provision could provide an
undue benefit to a banking organization
that had an ECR shortfall prior to its
adoption of CECL and could undermine
an objective of the CECL transition
provision to provide relief to banking
organizations that experience an
immediate adverse impact to regulatory
capital as a result of CECL adoption.
Therefore, the agencies are proposing to
limit the CECL transitional amount that
such an electing advanced approaches
banking organization can include in
retained earnings. As part of this
proposal, an electing advanced
approaches banking organization that
(1) has completed the parallel run
process, (2) has an ECR shortfall
immediately prior to the adoption of
CECL, and (3) would have an increase
in CET1 capital as of the beginning of
the fiscal year in which it adopts CECL
after including the first year portion of
the CECL transitional amount, must
decrease its CECL transitional amount
by its DTA transitional amount.21 The
20 See 12 CFR 3.121(d) (OCC); 12 CFR 217.121(d)
(Board); and 12 CFR 324.121(d) (FDIC).
21 For example, if a banking organization has
completed the parallel run process, has an ECR
shortfall immediately prior to the adoption of CECL,
would have an increase in CET1 capital as of the
beginning of the fiscal year in which it adopts CECL
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22319
agencies believe requiring such an
advanced approaches banking
organization to reduce its CECL
transitional amount by its DTA
transitional amount would be simple to
implement and thus would not be
operationally burdensome. As an
alternative approach, the agencies also
would consider requiring an electing
advanced approaches banking
organization with an ECR shortfall
immediately prior to the adoption of
CECL to reduce its CECL transitional
amount by the amount necessary to
cause its CET1 capital upon adoption of
CECL to not exceed CET1 capital
immediately prior to adoption of CECL.
Question 6: The agencies are
requesting comment on whether the
definition of eligible credit reserves is
appropriate for determining the amount
of allowances that may be included in
an advanced approaches banking
organization’s total capital. What, if
any, alternatives with respect to the
treatment of eligible credit reserves
should the agencies consider and what
are the associated advantages and
disadvantages of such alternatives?
Question 7: The agencies are
requesting comment on the proposed
CECL transitional amount limitation for
certain advanced approaches banking
organizations that have an ECR
shortfall. What, if any, are the
associated advantages and
disadvantages of the alternatives
provided by the agencies?
D. Disclosures and Regulatory Reporting
Under the proposed rule, banking
organizations subject to the disclosure
requirements in section 63 of the capital
rules would be required to update their
disclosures to reflect the adoption of
CECL. For example, such banking
organizations would be required to
disclose ACL instead of ALLL after
CECL adoption.
For advanced approaches banking
organizations, the agencies propose
similar revisions to Tables 2, 3, and 5
in section 173 of the capital rules to
reflect the adoption of CECL. In
addition, the agencies are proposing
revisions to those tables for electing
advanced approaches banking
organizations to disclose two sets of
regulatory capital ratios. One set would
after including the first year portion of the CECL
transitional amount, and, upon the adoption of
CECL, records an increase to ACL (credit) of
$200,000, with an offsetting increase in temporary
difference DTAs of $42,000 (debit), and a reduction
in beginning retained earnings of $158,000 (debit),
then that banking organization would have a CECL
transitional amount of $116,000
($158,000¥$42,000), and would apply $87,000 in
year 1, $58,000 in year 2, and $29,000 in year 3 of
the transition period.
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reflect the banking organization’s capital
ratios with the CECL transition
provision and the other set would
reflect the banking organization’s capital
ratios on a fully phased-in basis.
In addition, to reflect changes in U.S.
GAAP, the agencies anticipate
proposing revisions to the regulatory
reporting forms in a separate proposal.
These proposed revisions would specify
how electing banking organizations
would report their transitional amounts
for the affected line items in Schedule
RC–R of the Call Report and Schedule
HC–R of the FR Y–9C. In addition, the
agencies intend to update instructions
for certain other reporting forms,
including the FFIEC 101, to account for
the CECL transition provision.
E. Conforming Changes to Other Agency
Regulations
1. OCC Regulations
In addition to the capital rules, seven
provisions in other OCC regulations
refer to ALLL, as defined in 12 CFR part
3, in calculating various statutory or
regulatory limits. Specifically, ALLL is
used in calculating limits on holdings of
certain investment securities (12 CFR
part 1); limits on ownership of bankers’
bank stock (12 CFR 5.20); limits on
investments in bank premises (12 CFR
5.37); limits on leasing of personal
property (12 CFR 23.4); limits on certain
community development investments
(12 CFR 24.4); lending limits (12 CFR
part 32); and, limits on improvements to
other real estate owned (12 CFR part 34,
subpart E).
The OCC proposes to revise the
calculations used in those sections that
currently reference ALLL to also
reference ACL, once a banking
organization has adopted the FASB
standard. This proposed conforming
revision will ensure that banking
organizations will not experience a
material decrease in any of the affected
limits due to the adoption of CECL.
In addition, the OCC proposes to
make conforming edits to the
terminology used in the OCC’s stress
testing regulation at 12 CFR part 46 to
incorporate the new CECL methodology.
2. Board Regulations
Certain other regulations of the Board
reflect the current practice of banking
organizations establishing ALLL under
the incurred loss methodology to cover
estimated credit losses on loans, lease
financing receivables, or other
extensions of credit. As discussed in
this proposal, banking organizations
that adopt CECL will hold ACL to cover
expected credit losses on a broader array
of financial assets than covered by the
ALLL. As a result, the proposal would
make conforming changes to those other
regulations.
Specifically, the proposal would
amend the definition of ‘‘capital stock
and surplus’’ in the Board’s Regulation
H, 12 CFR part 208, to include the
balance of a member bank’s allowance
for credit losses. Similarly, the proposal
would incorporate ‘‘allowance for credit
losses’’ in the definition of ‘‘capital
stock and surplus’’ in the Board’s
Regulation K, 12 CFR part 211;
Regulation W, 12 CFR part 223; and
Regulation Y, 12 CFR part 225. A related
change would be made to the definition
of unimpaired capital and unimpaired
surplus in the Board’s Regulation O, 12
CFR part 215.
The proposal would make a similar
change to the Board’s Regulation K
relating to the establishment of an
allocated transfer risk reserve (ATRR).
Specifically, the proposal would
replace, for CECL adopters, all
references to ALLL, in the section
relating to the accounting treatment of
ATRR, with ACL.
The proposal incorporates technical
amendments to § 225.127 of the Board’s
Regulation Y to provide corrected
reference citations to sections of
Regulation Y that have been revised and
renumbered.
Finally, the Board is proposing to
amend its stress testing rules in the
Board’s Regulation YY, 12 CFR part 252,
to address the changes made in U.S.
GAAP following the issuance of ASU
No. 2016–13. Specifically, the Board is
proposing to require a banking
organization that has adopted CECL to
include its provision for credit losses
beginning in the 2020 stress test cycle,
which would include provisions
calculated under ASU No. 2016–13,
instead of its provision for loan and
lease losses, in its stress testing
methodologies and data and information
required to be submitted to the Board
and that the disclosure of the results of
those stress tests includes estimates of
those provisions. To promote
comparability of stress test results
across firms, the proposal would
provide that, for the 2018 and 2019
stress test cycles, a banking organization
would continue to use its provision for
loan and lease losses, as would be
calculated under the incurred loss
methodology, even if the firm adopted
CECL in 2019. Finally, under the
proposal, a banking organization that
does not adopt CECL until 2021 would
not be required to include its provision
for credit losses for these purposes until
the 2021 stress test cycle. The following
table describes the stress test cycles in
which a banking organization would be
required to use its provision for credit
losses instead of the provision for loan
and lease losses, based on varying dates
of adoption of ASU No. 2016–13.
TABLE 2—SUMMARY OF USE OF PROVISIONS IN 2019–2021 STRESS TEST CYCLES
2019 Stress test cycle
2020 Stress test cycle
2019 .......................
2020 .......................
2021 .......................
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Year of adoption of
ASU No. 2016–13
Provision for loan and lease losses .....
Provision for loan and lease losses .....
Provision for loan and lease losses .....
Provision for credit losses ....................
Provision for credit losses ....................
Provision for loan and lease losses .....
The proposal would make a similar
change to the Board’s company-run
stress test requirements to require a
banking organization that has adopted
CECL, beginning in the 2020 stress test
cycle, to incorporate the effects of the
maintenance of ACL when estimating
the impact on pro forma regulatory
capital levels and pro forma capital
ratios.
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Question 8: The Board seeks comment
on whether requiring a banking
organization that adopts CECL in 2019
not to include provisions for credit
losses in the 2019 stress test cycle would
create additional burden or complexity.
Question 9: The Board seeks comment
on whether, apart from the approach
described, additional changes should be
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2021 Stress test cycle
Provision for credit losses.
Provision for credit losses.
Provision for credit losses.
made to its stress testing rules to
address the accounting change.
3. FDIC Regulations
The proposal would also make
conforming amendments to references
to provisions or ALLL in the FDIC’s
regulations. Specifically, the proposal
would replace, for CECL adopters, all
references to ALLL with ACL (as
applicable) in the FDIC’s capital rules
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22321
codified at 12 CFR part 324, including
in the definitions of ‘‘identified losses’’
and ‘‘standardized total risk-weighted
assets.’’ The proposal would also make
the same conforming changes to the
following FDIC regulations by replacing
all references to ALLL with ACL as
applicable: 12 CFR parts 327, 347 and
390. Finally, consistent with the
proposed changes to the Board’s stress
testing rules, the proposal would make
similar conforming changes to the
FDIC’s stress testing rules codified at 12
CFR part 325.
c. Ways to enhance the quality,
utility, and clarity of the information to
be collected;
d. Ways to minimize the burden of the
information collections on respondents,
including through the use of automated
collection techniques or other forms of
information technology; and
e. Estimates of capital or startup costs
and costs of operation, maintenance,
and purchase of services to provide
information.
Respondents: National banks, state
member banks, state nonmember banks,
and state and federal savings
associations.
OMB control number: 1557–0318.
Estimated number of respondents:
1,365 (of which 18 are advanced
approaches institutions).
Estimated average hours per response:
Disclosure Burden—Advanced
Approaches Banking Organizations
Standardized Approach
F. Additional Requests for Comment
Current Actions
Section 173 of the capital rules
requires that advanced approaches
banking organizations publicly disclose
capital-related information as provided
in a series of 13 tables. For advanced
approaches banking organizations, the
agencies propose revisions to Tables 2,
3, and 5 in section 173 of the capital
rules to reflect the adoption of CECL. In
addition, the agencies are proposing
revisions to those tables for electing
advanced approaches banking
organizations to disclose two sets of
regulatory capital ratios. One set would
reflect such banking organization’s
capital ratios with the CECL transition
provision and the other set would
reflect the banking organization’s capital
ratios on a fully phased-in basis. This
aspect of the proposed rule affects the
below-listed information collections.
The changes in the disclosure
requirements to Tables 2, 3, and 5 in
section 173 of the capital rules would
result in an increase in the average
hours per response per agency of 48
hours for the initial setup burden. In
addition, the changes in the disclosure
requirements to Tables 2, 3, and 5 in
section 173 of the capital rules would
result in an increase in the average
hours per response per agency of 6
hours for ongoing (quarterly) burden.22
The agencies seek comment on all
aspects of the proposal. Comments are
requested about the potential
advantages of the proposal in ensuring
the individual safety and soundness of
these banking organizations as well as
on the stability of the financial system.
III. Regulatory Analyses
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A. Paperwork Reduction Act
Certain provisions of the proposed
rule contain ‘‘collection of information’’
requirements within the meaning of the
Paperwork Reduction Act (PRA) of 1995
(44 U.S.C. 3501–3521). In accordance
with the requirements of the PRA, the
agencies may not conduct or sponsor,
and a respondent is not required to
respond to, an information collection
unless it displays a currently valid
Office of Management and Budget
(OMB) control number. The agencies
reviewed the proposed rule and
determined that the proposed rule
revises certain disclosure and reporting
requirements that have been previously
cleared by the OMB under various
control numbers. The agencies are
proposing to extend for three years, with
revision, these information collections.
The information collections for the
disclosure requirements contained in
this proposed rulemaking have been
submitted by the OCC and FDIC to OMB
for review and approval under section
3507(d) of the PRA (44 U.S.C. 3507(d))
and § 1320.11 of the OMB’s
implementing regulations (5 CFR part
1320). The Board reviewed the proposed
rule under the authority delegated to the
Board by OMB.
Comments are invited on:
a. Whether the collections of
information are necessary for the proper
performance of the agencies’ functions,
including whether the information has
practical utility;
b. The accuracy or the estimate of the
burden of the information collections,
including the validity of the
methodology and assumptions used;
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Proposed Revision, With Extension, of
the Following Information Collections
OCC
Title of Information Collection: RiskBased Capital Standards: Advanced
Capital Adequacy Framework.
Frequency: Quarterly, annual.
Affected Public: Businesses or other
for-profit.
22 In an effort to provide transparency, the total
cumulative burden for each agency is shown. In
addition, as stated in the Notice of Proposed
Rulemaking, Simplifications to the Capital Rule
Pursuant to the Economic Growth and Regulatory
Paperwork Reduction Act of 1996, 82 FR 49984
(October 27, 2017), in order to be consistent across
the agencies, the agencies are also applying a
conforming methodology for calculating the burden
estimates.
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Minimum Capital Ratios
Recordkeeping (Ongoing)—16.
Recordkeeping (Initial setup)—122.
Recordkeeping (Ongoing)—20.
Disclosure (Initial setup)—226.25.
Disclosure (Ongoing quarterly)—
131.25.
Advanced Approaches
Recordkeeping (Initial setup)—460.
Recordkeeping (Ongoing)—540.77.
Recordkeeping (Ongoing quarterly)—
20.
Disclosure (Initial setup)—328.
Disclosure (Ongoing)—5.78.
Disclosure (Ongoing quarterly)—41.
Proposed revisions estimated annual
burden: 432 hours.
Estimated annual burden hours: 1,136
hours initial setup, 64,945 hours for
ongoing.
Board
Title of Information Collection:
Recordkeeping and Disclosure
Requirements Associated with
Regulation Q.
Frequency: Quarterly, annual.
Affected Public: Businesses or other
for-profit.
Respondents: State member banks
(SMBs), bank holding companies
(BHCs), U.S. intermediate holding
companies (IHCs), savings and loan
holding companies (SLHCs), and global
systemically important bank holding
companies (GSIBs).
Legal authorization and
confidentiality: This information
collection is authorized by section 38(o)
of the Federal Deposit Insurance Act (12
U.S.C. 1831o(c)), section 908 of the
International Lending Supervision Act
of 1983 (12 U.S.C. 3907(a)(1)), section
9(6) of the Federal Reserve Act (12
U.S.C. 324), and section 5(c) of the Bank
Holding Company Act (12 U.S.C.
1844(c)). The obligation to respond to
this information collection is
mandatory. If a respondent considers
the information to be trade secrets and/
or privileged such information could be
withheld from the public under the
authority of the Freedom of Information
Act (5 U.S.C. 552(b)(4)). Additionally, to
the extent that such information may be
contained in an examination report such
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Federal Register / Vol. 83, No. 93 / Monday, May 14, 2018 / Proposed Rules
information could also be withheld from
the public (5 U.S.C. 552 (b)(8)).
Agency form number: FR Q.
OMB control number: 7100–0313.
Estimated number of respondents:
1,431 (of which 17 are advanced
approaches institutions).
Estimated average hours per response:
Disclosure (Ongoing quarterly)—41.
Proposed revisions estimated annual
burden: 96 hours.
Estimated annual burden hours: 1,136
hours initial setup, 133,038 hours for
ongoing.
Minimum Capital Ratios
Current Actions
Recordkeeping (Ongoing)—16.
Standardized Approach
Recordkeeping (Initial setup)—122.
Recordkeeping (Ongoing)—20.
Disclosure (Initial setup)—226.25.
Disclosure (Ongoing quarterly)—
131.25.
Advanced Approaches
Recordkeeping (Initial setup)—460.
Recordkeeping (Ongoing)—540.77.
Recordkeeping (Ongoing quarterly)—
20.
Disclosure (Initial setup)—328.
Disclosure (Ongoing)—5.78.
Disclosure (Ongoing quarterly)—41.
Disclosure (Table 13 quarterly)—5.
Risk-based Capital Surcharge for GSIBs
Recordkeeping (Ongoing)—0.5.
Proposed revisions estimated annual
burden: 456 hours.
Estimated annual burden hours: 1,136
hours initial setup, 78,591 hours for
ongoing.
FDIC
Title of Information Collection:
Regulatory Capital Rules.
Frequency: Quarterly, annual.
Affected Public: Businesses or other
for-profit.
Respondents: State nonmember
banks, state savings associations, and
certain subsidiaries of those entities.
OMB control number: 3064–0153.
Estimated number of respondents:
3,637 (of which 2 are advanced
approaches institutions).
Estimated average hours per response:
Minimum Capital Ratios
Recordkeeping (Ongoing)—16.
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Standardized Approach
Recordkeeping (Initial setup)—122.
Recordkeeping (Ongoing)—20.
Disclosure (Initial setup)—226.25.
Disclosure (Ongoing quarterly)—
131.25.
Advanced Approaches
Recordkeeping (Initial setup)—460.
Recordkeeping (Ongoing)—540.77.
Recordkeeping (Ongoing quarterly)—
20.
Disclosure (Initial setup)—328.
Disclosure (Ongoing)—5.78.
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Reporting Burden—FFIEC and Board
Forms
The agencies also plan to make
changes to certain FFIEC and Board
reporting forms and/or their related
instructions as a result of the issuance
of ASU 2016–13. In particular, the forms
and/or related instructions for the
following FFIEC reports could be
affected: Consolidated Reports of
Condition and Income (Call Reports)
(FFIEC 031, FFIEC 041, and FFIEC 051;
OMB No. 1557–0081, 7100–0036, and
3064–0052), Report of Assets and
Liabilities of U.S. Branches and
Agencies of Foreign Banks (FFIEC 002;
OMB No. 7100–0032), Report of Assets
and Liabilities of a Non-U.S. Branch that
is Managed or Controlled by a U.S.
Branch or Agency of a Foreign (NonU.S.) Bank (FFIEC 002S; OMB No.
7100–0032), Annual Dodd-Frank Act
Company-Run Stress Test Report for
Depository Institutions and Holding
Companies with $10–$50 Billion in
Total Consolidated Assets (FFIEC 016;
OMB No. 1557–0311, 7100–0356, and
3064–0187), Foreign Branch Report of
Condition (FFIEC 030; OMB No. 1557–
0099, 7100–0071, and 3064–0011),
Abbreviated Foreign Branch Report of
Condition (FFIEC 030S; OMB No. 1557–
0099, 7100–0071, and 3064–0011), and
Regulatory Capital Reporting for
Institutions Subject to the Advanced
Capital Adequacy Framework (FFIEC
101; OMB No. 1557–0239, 7100–0319,
and 3064–0159). The forms and/or
related instructions for the following
Board reports could be affected:
Financial Statements of Foreign
Subsidiaries of U.S. Banking
Organizations (FR 2314; OMB No. 7100–
0073), Domestic Finance Company
Report of Consolidated Assets and
Liabilities (FR 2248; OMB No. 7100–
0005), Weekly Report of Selected Assets
and Liabilities of Domestically
Chartered Commercial Banks and U.S.
Branches and Agencies of Foreign Banks
(FR 2644; OMB No. 7100–0075),
Consolidated Report of Condition and
Income for Edge and Agreement
Corporations (FR 2886b; OMB No.
7100–0086), Financial Statements of
U.S. Nonbank Subsidiaries Held by
Foreign Banking Organizations (FR Y–
7N; 7100–0125), Consolidated Financial
Statements for Holding Companies (FR
Y–9C; OMB No. 7100–0128), Parent
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Company Only Financial Statements for
Large Holding Companies (FR Y–9LP;
OMB No. 7100–0128), Parent Company
Only Financial Statements for Small
Holding Companies (FR Y–9SP; OMB
No. 7100–0128), Financial Statements of
U.S. Nonbank Subsidiaries of U.S.
Holding Companies (FR Y–11; OMB No.
7100–0244), Capital Assessments and
Stress Testing (FR Y–14; OMB No.
7100–0341), and Banking Organization
Systemic Risk Report (FR Y–15; OMB
No. 7100–0352). These changes to the
FFIEC forms and/or instructions as well
as the Board forms and/or instructions
would be addressed in separate Federal
Register notices.
B. Regulatory Flexibility Act
OCC: The Regulatory Flexibility Act,
5 U.S.C. 601 et seq., (RFA), requires an
agency, in connection with a proposed
rule, to prepare an Initial Regulatory
Flexibility Analysis describing the
impact of the rule on small entities
(defined by the Small Business
Administration (SBA) for purposes of
the RFA to include commercial banks
and savings institutions with total assets
of $550 million or less and trust
companies with total revenue of $38.5
million or less) or to certify that the
proposed rule would not have a
significant economic impact on a
substantial number of small entities. As
of December 31, 2016, the OCC
supervised 956 small entities. The rule
would apply to all OCC-supervised
entities that are not subject to the
advanced approaches risk-based capital
rules, and thus potentially affects a
substantial number of small entities. To
determine whether a proposed rule
would have a significant effect on those
small entities, the OCC considers
whether the economic impact associated
with the proposed rule is greater than or
equal to either 5 percent of a small
entity’s total annual salaries and
benefits or 2.5 percent of a small entity’s
total non-interest expense. The OCC
estimates the proposed rule would not
generate any costs for affected small
entities. The proposed rule may
generate a benefit for those small
entities that elect the transition of
approximately $13,000 per electing
small entity supervised by the OCC.
This estimate is based on the potential
savings to small entities from not
needing to raise additional capital
related to CECL implementation due to
the proposed regulatory capital
transition. The estimated benefit is not
significant in relation to the measures
described above. Therefore, the OCC
certifies that the proposed rule would
not have a significant economic impact
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Federal Register / Vol. 83, No. 93 / Monday, May 14, 2018 / Proposed Rules
on a substantial number of OCCsupervised small entities.
Board: The RFA requires an agency to
consider whether the rules it proposes
will have a significant economic impact
on a substantial number of small
entities.23 In connection with a
proposed rule, the RFA requires an
agency to prepare an initial regulatory
flexibility analysis describing the
impact of the rule on small entities or
to certify that the proposed rule would
not have a significant economic impact
on a substantial number of small
entities. An initial regulatory flexibility
analysis must contain (1) a description
of the reasons why action by the agency
is being considered; (2) a succinct
statement of the objectives of, and legal
basis for, the proposed rule; (3) a
description of, and, where feasible, an
estimate of the number of small entities
to which the proposed rule will apply;
(4) a description of the projected
reporting, recordkeeping, and other
compliance requirements of the
proposed rule, including an estimate of
the classes of small entities that will be
subject to the requirement and the type
of professional skills necessary for
preparation of the report or record; (5)
an identification, to the extent
practicable, of all relevant Federal rules
which may duplicate, overlap with, or
conflict with the proposed rule; and (6)
a description of any significant
alternatives to the proposed rule which
accomplish its stated objectives.
The Board has considered the
potential impact of the proposed rule on
small entities in accordance with the
RFA. Based on its analysis and for the
reasons stated below, the Board believes
that this proposed rule will not have a
significant economic impact on a
substantial number of small entities.
Nevertheless, the Board is publishing
and inviting comment on this initial
regulatory flexibility analysis. A final
regulatory flexibility analysis will be
conducted after comments received
during the public comment period have
been considered.
As discussed in detail above, the
agencies are proposing to identify which
credit loss allowances under GAAP
(ASU No. 2016–13) are eligible for
inclusion in regulatory capital and to
provide banking organization the option
to phase in, over a three-year period, the
23 Under regulations issued by the Small Business
Administration, a small entity includes a depository
institution, bank holding company, or savings and
loan holding company with total assets of $550
million or less and trust companies with total assets
of $38.5 million or less. As of December 31, 2017,
there were approximately 3,384 small bank holding
companies, 230 small savings and loan holding
companies, and 559 small state member banks.
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18:34 May 11, 2018
Jkt 244001
effect on regulatory capital that may
result from adoption of this accounting
standard (ASU No. 2016–13). The
proposal also would make conforming
amendments to other regulations.
The Board has authority under the
International Lending Supervision Act
(ILSA) 24 and the PCA provisions of the
Federal Deposit Insurance Act 25 to
establish regulatory capital
requirements for the institutions it
regulates. For example, ILSA directs
each Federal banking agency to cause
banking institutions to achieve and
maintain adequate capital by
establishing minimum capital
requirements as well as by other means
that the agency deems appropriate.26
The PCA provisions of the Federal
Deposit Insurance Act direct each
Federal banking agency to specify, for
each relevant capital measure, the level
at which an insured depository
institution is well capitalized,
adequately capitalized,
undercapitalized, and significantly
undercapitalized.27 In addition, the
Board has authority to establish
regulatory capital standards for bank
holding companies under ILSA 28 and
the Bank Holding Company Act 29 and
for savings and loan holding companies
under the Home Owners Loan Act.30
All banking organizations will be
required to adopt ASU No. 2016–13,
which will likely result in an increase
in credit loss allowances. An increase in
a banking organization’s credit loss
allowances will reduce the firm’s
retained earnings and therefore its CET1
capital. The proposed rule would
identify those credit loss allowances
under ASU No. 2016–13 that would be
eligible for inclusion in regulatory
capital. Further, the proposed rule
would introduce a three-year transition
period, which would allow a banking
organization to phase in the immediate
impact of adoption of ASU No. 2016–13.
During the transition period, a banking
organization that elects to use the phasein would report higher capital than it
otherwise would under the current
capital rules.
The proposed rule also would make
conforming amendments to certain of
the Board’s other regulations. In
particular, certain other regulations of
the Board include a definition of
‘‘capital stock and surplus,’’ which
reflect the current practice of banking
24 12
U.S.C. 3901–3911.
U.S.C. 1831o.
26 12 U.S.C. 3907(a)(1).
27 12 U.S.C. 1831o(c)(2).
28 See 12 U.S.C. 3907.
29 See 12 U.S.C. 1844.
30 See 12 U.S.C. 1467a(g)(1).
25 12
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22323
organizations establishing ALLL to
cover estimated credit losses on loans,
lease financing receivables, or other
extensions of credit. The proposed rule
would allow banking organizations that
are subject to these regulations to also
include in the definition of ‘‘capital
stock and surplus’’ those credit loss
allowances under ASU No. 2016–13 that
would be eligible for inclusion in
regulatory capital. Most aspects of the
proposed rule would apply to all state
member banks, as well as generally all
bank holding companies and savings
and loan holding companies that are
subject to the Board’s capital rule.
However, in virtually all cases, the
Board’s capital rule only applies to bank
holding companies and savings and
loan holding companies with greater
than $1 billion in total assets. Thus,
virtually all bank holding companies
that would be subject to the proposed
rule do not qualify as small banking
organizations. With respect to state
member banks that do qualify as small
banking organizations, the proposed
revision to the Board’s capital rule
would should have an economic benefit
as they will be able to include
additional credit loss allowances into
regulatory capital than they otherwise
would under the current capital rules.
Therefore, the Board estimates the
proposed rule would not generate any
costs for affected small entities.
The proposed rule would not impact
the recordkeeping and reporting
requirements to which affected small
banking organizations are currently
subject. The agencies anticipate
updating the relevant reporting forms at
a later date.
The Board does not believe that the
proposed rule duplicates, overlaps, or
conflicts with any other Federal rules.
In light of the foregoing, the Board does
not believe that the proposed rule, if
adopted in final form, would have a
significant economic impact on a
substantial number of small entities and
therefore believes that there are no
significant alternatives to the proposed
rule that would reduce the economic
impact on small banking organizations
supervised by the Board. Nonetheless,
the Board seeks comment on whether
the proposed rule would impose undue
burdens on, or have unintended
consequences for, small organizations,
and whether there are ways such
potential burdens or consequences
could be minimized in a manner
consistent with the purpose of the
proposed rule. A final regulatory
flexibility analysis will be conducted
after consideration of comments
received during the public comment
period.
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FDIC: Statement of the Regulatory
Flexibility Act Requirements
The RFA generally requires that, in
connection with a notice of proposed
rulemaking, an agency prepare and
make available for public comment an
initial regulatory flexibility analysis
describing the impact of the proposed
rule on small entities.31 A regulatory
flexibility analysis is not required,
however, if the agency certifies that the
rule will not have a significant
economic effect on a substantial number
of small entities. The SBA has defined
‘‘small entities’’ to include banking
organizations with total assets less than
or equal to $550 million.32
amozie on DSK3GDR082PROD with PROPOSALS1
Description of Need and Policy
Objectives
In June 2016, the FASB issued ASU
No. 2016–13, which revises the
accounting for credit losses under U.S.
GAAP. CECL differs from the incurred
loss methodology currently
implemented by institutions in several
key respects. CECL requires banking
organizations to recognize lifetime
expected credit losses for financial
assets measured at amortized cost, not
just those credit losses that are probable
of having been incurred as of the
reporting date. In addition to
maintaining the current requirement for
banking organizations to consider past
events and current conditions, CECL
requires the incorporation of reasonable
and supportable forecasts in developing
an estimate of lifetime expected credit
losses.
Upon adoption of CECL, a banking
organization will record a one-time
adjustment to its allowance for credit
losses as of the beginning of its fiscal
year of adoption equal to the difference,
if any, between the amount of credit loss
allowances required under the incurred
loss methodology and the amount of
credit loss allowances required under
the CECL methodology. Changes to
retained earnings, DTAs, and ALLL
affect a banking organization’s
calculation of regulatory capital.33 To
address changes made in U.S. GAAP
following the FASB’s issuance of ASU
No. 2106–13, the FDIC is proposing to
amend its capital rule 34 to give banking
organizations the option to phase in the
31 5
U.S.C. 601 et seq.
CFR 121.201 (as amended, effective
December 2, 2014).
33 12 CFR 3.20 (OCC); 12 CFR 217.20 (Board); 12
CFR 324.20 (FDIC).
34 Under section 37 of the Federal Deposit
Insurance Act, the accounting principles applicable
to reports or statements required to be filed with the
agencies by all insured depository institutions must
be uniform and consistent with U.S. GAAP. See 12
U.S.C. 1831n(a)(2)(A).
32 13
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immediate, potentially adverse effects of
CECL adoption over a three-year period.
Description of the Proposal
A description of the proposal is
presented Section II: Description of the
Proposed Rule. Please refer to it for
further information.
Other Federal Rules
The FDIC has not identified any likely
duplication, overlap, and/or potential
conflict between the proposed rule and
any federal rule.
Economic Impacts on Small Entities
The proposed rule could affect all
FDIC-supervised small entities. The
FDIC supervises 3,637 depository
institutions, of which 2,924 are defined
as small banking entities by the terms of
the RFA.35 However, the number of
small entities that elect to utilize the
proposed three-year transition schedule
is difficult to estimate. Utilization will
depend on an institution’s business
model, the preferences of senior
management or ownership, the assets
held by the institution and reasonable
expectation of future macroeconomic
conditions, among other things.
The proposal, if implemented, would
benefit small institutions who adopt the
proposed three-year transition schedule
by allowing them to phase-in any
increases in capital associated with the
implementation of CECL over that time.
The three year transition schedule
would reduce the costs associated with
potential increases in capital relative to
the immediate impact of CECL adoption
by allowing institutions to raise capital
levels gradually, over-time. It is difficult
to accurately estimate the potential
benefit for small institutions with
available data because it depends on the
assets held by small institutions, their
provision activity, future economic
conditions, and the decisions of senior
management, among other things.
The proposal would pose some small
regulatory costs for institutions that opt
to utilize the three-year transition
schedule. Changes in disclosure
requirements for capital rules would
result in an estimated increase of 48
hours on average hours per response per
agency for the initial setup burden, as
well as an estimated increase of 6 hours
per response per agency for ongoing
(quarterly) burden. Additionally, small
entities that are subsidiaries of large
complex institutions may have
additional regulatory costs associated
with changes in disclosure
requirements. However, those costs are
also likely to be small. Further, the
35 FDIC
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small regulatory costs associated with
implementing proposed three-year
transition schedule will be
demonstrably less than the benefits
posed by utilizing the schedule for those
institutions that opt to utilize it.
Therefore, the FDIC does not believe
that the proposed rule would have a
significant economic impact on a
substantial number of small entities.
Alternatives Considered
As an alternative to the proposed rule,
the FDIC considered allowing CECL to
go into effect with no accompanying
action by the financial regulators.
However, this alternative would likely
result in higher costs for small entities.
Additionally, the FDIC considered the
alternative of a longer transition period
of up to five years. While this
alternative might reduce the costs of
adopting CECL more than the proposed
alternative, it also heightens the risk of
capital increases coinciding with a
potential future downturn in the
business cycle. The coincidence of
rising capital requirements during a
future downturn in the business cycle
could reduce the benefits of the
proposed rule and have deleterious
effects on lending activity.
Solicitation of Comments
The FDIC invites comments on all
aspects of the supporting information
provided in this RFA section.
Particularly, the FDIC invites comments
on the effects the proposed rule will
have on capital for institutions and the
magnitude of those effects.
C. Plain Language
Section 722 of the Gramm-LeachBliley Act requires the federal banking
agencies to use plain language in all
proposed and final rules published after
January 1, 2000. The agencies have
sought to present the proposed rule in
a simple and straightforward manner,
and invite comment on the use of plain
language. For example:
• Have the agencies organized the
material to suit your needs? If not, how
could they present the proposed rule
more clearly?
• Are the requirements in the
proposed rule clearly stated? If not, how
could the proposed rule be more clearly
stated?
• Do the regulations contain technical
language or jargon that is not clear? If
so, which language requires
clarification?
• Would a different format (grouping
and order of sections, use of headings,
paragraphing) make the regulation
easier to understand? If so, what
changes would achieve that?
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• Would more, but shorter, sections
be better? If so, which sections should
be changed?’’
• What other changes can the
agencies incorporate to make the
regulation easier to understand?
that further will inform the agencies’
consideration of RCDRIA.
List of Subjects
12 CFR Part 1
D. OCC Unfunded Mandates Reform Act
of 1995
The OCC analyzed the proposed rule
under the factors set forth in the
Unfunded Mandates Reform Act of 1995
(UMRA) (2 U.S.C. 1532). Under this
analysis, the OCC considered whether
the proposed rule includes a federal
mandate that may result in the
expenditure by state, local, and Tribal
governments, in the aggregate, or by the
private sector, of $100 million or more
in any one year (adjusted for inflation).
The OCC has determined that this
proposed rule would not result in
expenditures by state, local, and Tribal
governments, or the private sector, of
$100 million or more in any one year.
Accordingly, the OCC has not prepared
a written statement to accompany this
proposal.
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E. Riegle Community Development and
Regulatory Improvement Act of 1994
The Riegle Community Development
and Regulatory Improvement Act of
1994 (RCDRIA) requires that each
federal banking agency, in determining
the effective date and administrative
compliance requirements for new
regulations that impose additional
reporting, disclosure, or other
requirements on insured depository
institutions, consider, consistent with
principles of safety and soundness and
the public interest, any administrative
burdens that such regulations would
place on depository institutions,
including small depository institutions,
and customers of depository
institutions, as well as the benefits of
such regulations. In addition, new
regulations and amendments to
regulations that impose additional
reporting, disclosures, or other new
requirements on insured depository
institutions generally must take effect
on the first day of a calendar quarter
that begins on or after the date on which
the regulations are published in final
form.36
The agencies note that comment on
these matters has been solicited in other
sections of this Supplementary
Information section, and that the
requirements of RCDRIA will be
considered as part of the overall
rulemaking process. In addition, the
agencies also invite any other comments
36 12
18:34 May 11, 2018
12 CFR Part 3
Administrative practice and
procedure, Capital, National banks,
Risk.
12 CFR Part 5
Administrative practice and
procedure, Federal savings associations,
National banks, Reporting and
recordkeeping requirements, Securities.
12 CFR Part 23
Banks, banking, National banks, Lease
financing transactions, Leasing,
Reporting and recordkeeping
requirements.
12 CFR Part 24
Affordable housing, Community
development, Credit, Investments,
Economic development and job
creation, Low- and moderate-income
areas, Low- and moderate-income
housing, National banks, Public welfare
investments, Reporting and
recordkeeping requirements, Rural
areas, Small businesses, Tax credit
investments.
12 CFR Part 32
National banks, Reporting and
recordkeeping requirements.
12 CFR Part 34
Appraisal, Appraiser, Banks, banking,
Consumer protection, Credit, Mortgages,
National banks, Reporting and
recordkeeping requirements, Savings
associations, Truth in lending.
12 CFR Part 46
Banking, Banks, Capital, Disclosures,
National banks, Recordkeeping, Risk,
Savings associations, Stress test.
12 CFR Part 208
Confidential business information,
Crime, Currency, Federal Reserve
System, Mortgages, reporting and
recordkeeping requirements, Securities.
12 CFR Part 211
Exports, Federal Reserve System,
Foreign banking, Holding companies,
Investments, Reporting and
recordkeeping requirements.
12 CFR Part 217
Administrative practice and
procedure, Banks, Banking, Capital,
Federal Reserve System, Holding
companies, Reporting and
recordkeeping requirements, Risk,
Securities.
12 CFR Part 223
Banks, Banking, Federal Reserve
System.
12 CFR Part 225
Administrative practice and
procedure, Banks, banking, Federal
Reserve System, Holding companies,
Reporting and recordkeeping
requirements, Securities.
12 CFR Part 252
Administrative practice and
procedure, Banks, banking, Federal
Reserve System, Holding companies,
Reporting and recordkeeping
requirements, Securities.
12 CFR Part 324
Administrative practice and
procedure, Banks, banking, Reporting
and recordkeeping requirements,
Savings associations.
12 CFR Part 325
Banks, banking, Reporting and
recordkeeping requirements.
12 CFR Part 327
Bank deposit insurance, Banks,
banking, Savings associations.
12 CFR Part 347
Authority delegation (Government
agencies), Bank deposit insurance,
Banks, banking, Credit, Foreign banking,
Investments, Reporting and
recordkeeping requirements, U.S.
Investments abroad.
12 CFR Part 390
Administrative practice and
procedure, Advertising, Aged, Civil
rights, Conflict of interests, Credit,
Crime, Equal employment opportunity,
Fair housing, Government employees,
Individuals with disabilities, Reporting
and recordkeeping requirements,
Savings associations.
Office of the Comptroller of the
Currency
For the reasons set out in the joint
preamble, the OCC proposes to amend
12 CFR chapter I as follows.
PART 1—INVESTMENT SECURITIES
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12 CFR Part 215
1. The authority citation for part 1
continues to read as follows:
Credit, Penalties, Reporting and
recordkeeping requirements.
U.S.C. 4802.
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Banks, banking, National banks,
Reporting and recordkeeping
requirements, Securities.
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Authority: 12 U.S.C. 1 et seq., 24
(Seventh), and 93a.
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2. Section 1.2 is amended by revising
paragraph (a)(2) to read as follows:
§ 1.2
Definitions.
(a) * * *
(2) The balance of a bank’s allowance
for loan and lease losses or allowance
for credit losses, as applicable, not
included in the bank’s Tier 2 capital, for
purposes of the calculation of risk-based
capital described in paragraph (a)(1) of
this section, as reported in the bank’s
Call Report.
*
*
*
*
*
PART 3—CAPITAL ADEQUACY
STANDARDS
3. The authority citation for part 3
continues to read as follows:
■
Authority: 12 U.S.C. 93a, 161, 1462,
1462a, 1463, 1464, 1818, 1828(n), 1828 note,
1831n note, 1835, 3907, 3909, and
5412(b)(2)(B).
4. Section 3.2 is amended by:
a. Adding the definitions of
Allowance for credit losses (ACL) in
alphabetical order;
■ b. Revising the definition of Carrying
value;
■ c. Adding the definition of Current
expected credit losses (CECL) in
alphabetical order; and
■ d. Revising the definition of Eligible
credit reserves and paragraph (2) of the
definition of Standardized total riskweighted assets.
The revisions and additions read as
follows:
■
■
§ 3.2
Definitions.
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*
*
*
*
*
Allowance for credit losses (ACL)
means, with respect to a national bank
or Federal savings association that has
adopted CECL, valuation allowances
that have been established through a
charge against earnings or retained
earnings for expected credit losses on
financial assets measured at amortized
cost and a lessor’s net investment in
leases that have been established to
reduce the amortized cost basis of the
assets to amounts expected to be
collected as determined in accordance
with GAAP. For purposes of this part,
allowance for credit losses includes
allowances for expected credit losses on
off-balance sheet credit exposures not
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18:34 May 11, 2018
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accounted for as insurance as
determined in accordance with GAAP.
Allowance for credit losses excludes
‘‘allocated transfer risk reserves’’ and
allowances created that reflect credit
losses on purchased credit-deteriorated
assets and available-for-sale debt
securities.
*
*
*
*
*
Carrying value means, with respect to
an asset, the value of the asset on the
balance sheet of the national bank or
Federal savings association as
determined in accordance with GAAP.
For all assets other than available-forsale debt securities or purchased creditdeteriorated assets, the carrying value is
not reduced by any associated credit
loss allowance that is determined in
accordance with GAAP.
*
*
*
*
*
Current expected credit losses (CECL)
means the current expected credit losses
methodology under GAAP.
*
*
*
*
*
Eligible credit reserves means:
(1) For a national bank or Federal
savings association that has not adopted
CECL, all general allowances that have
been established through a charge
against earnings to cover estimated
credit losses associated with on- or offbalance sheet wholesale and retail
exposures, including the ALLL
associated with such exposures, but
excluding allocated transfer risk
reserves established pursuant to 12
U.S.C. 3904 and other specific reserves
created against recognized losses; and
(2) For a national bank or Federal
savings association that has adopted
CECL, all general allowances that have
been established through a charge
against earnings or retained earnings to
cover expected credit losses associated
with on- or off-balance sheet wholesale
and retail exposures, including ACL
associated with such exposures. Eligible
credit reserves exclude allocated
transfer risk reserves established
pursuant to 12 U.S.C. 3904, allowances
that reflect credit losses on purchased
credit-deteriorated assets and availablefor-sale debt securities, and other
specific reserves created against
recognized losses.
*
*
*
*
*
Standardized total risk-weighted
assets * * *
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(2) Any amount of a national bank’s
or Federal savings association’s
allowance for loan and lease losses or
allowance for credit losses, as
applicable, that is not included in tier
2 capital and any amount of ‘‘allocated
transfer risk reserves.’’
*
*
*
*
*
§ 3.10
[Amended]
5. Section 3.10(c)(3)(ii)(A) is amended
by removing the words ‘‘allowance for
loan and lease losses’’ and adding in
their place the words ‘‘allowance for
loan and lease losses or allowance for
credit losses, as applicable,’’.
■
§§ 3.20, 3.22, and 3.124
[Amended]
6. Sections 3.20, 3.22, and 3.124 are
amended by removing ‘‘ALLL’’
everywhere it appears and adding in its
place ‘‘ALLL or ACL, as applicable,’’,
except the second occurrence in
§ 3.20(d)(3) where ‘‘ALLL or ACL, as
applicable’’ is added in its place.
■
§ 3.63
[Amended]
7. Section 3.63 is amended in Table 5
by removing ‘‘allowance for loan and
lease losses,’’ and ‘‘allowance for loan
and lease losses’’ and adding in their
place ‘‘allowance for loan and lease
losses or allowance for credit losses, as
applicable,’’ and removing ‘‘ALLL’’ and
adding in its place ‘‘ALLL or ACL, as
applicable’’.
■
§ 3.173
[Amended]
8. Section 3.173 is amended:
■ a. In Table 2, by adding paragraph (e);
■ b. In Table 3, by revising paragraph
(e), redesignating paragraph (f) as
paragraph (g), and adding a new
paragraph (f); and
■ c. In Table 5, by:
■ i. Removing ‘‘allowance for loan and
lease losses,’’ and ‘‘allowance for loan
and lease losses’’ and adding in their
place ‘‘allowance for loan and lease
losses or allowance for credit losses, as
applicable,’’; and
■ ii. Revising paragraph (g).
The additions and revisions read as
follows:
■
§ 3.173 Disclosures by certain advanced
approaches national banks or Federal
savings associations.
*
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TABLE 2 TO § 3.173—CAPITAL STRUCTURE
*
*
(e) .....................
*
*
*
*
*
(1) Whether the national bank or Federal savings association has elected to phase in recognition of the
transitional adjustment amount as defined in § 3.301.
(2) The national bank’s or Federal savings association’s common equity tier 1 capital, tier 1 capital, and
total capital without including the transitional adjustment amount.
TABLE 3 TO § 3.173—CAPITAL ADEQUACY
*
*
(e) .....................
(f) ......................
*
*
*
*
*
*
*
*
(1) Common equity tier 1, tier 1 and total risk-based capital ratios reflecting the transition provisions described in § 3.301:
(A) For the top consolidated group; and
(2) For each depository institution subsidiary.
Common equity tier 1, tier 1 and total risk-based capital ratios reflecting the full adoption of CECL:
(1) For the top consolidated group; and
(2) For each depository institution subsidiary.
*
*
*
*
*
*
*
*
*
*
*
*
*
TABLE 5 1 TO § 3.173—CREDIT RISK: GENERAL DISCLOSURES
*
*
*
(g) .....................
*
*
*
Reconciliation of changes in ALLL or ACL, as applicable.6
*
*
*
*
1 Table
5 to § 3.173 does not cover equity exposures, which should be reported in Table 9.
*
*
*
*
*
*
*
6 The reconciliation should include the following: A description of the allowance; the opening balance of the allowance; charge-offs taken
against the allowance during the period; amounts provided (or reversed) for estimated probable loan losses during the period; any other adjustments (for example, exchange rate differences, business combinations, acquisitions and disposals of subsidiaries), including transfers between
allowances; and the closing balance of the allowance. Charge-offs and recoveries that have been recorded directly to the income statement
should be disclosed separately.
*
*
*
*
*
9. Section 3.301 is added to read as
follows:
■
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§ 3.301 Current expected credit losses
(CECL) transition.
(a) CECL transition provision—(1) A
national bank or Federal savings
association may elect to use a CECL
transition provision pursuant to this
section only if the national bank or
Federal savings association records a
reduction in retained earnings due to
the adoption of CECL as of the
beginning of the fiscal year in which the
national bank or Federal savings
association adopts CECL.
(2) A national bank or Federal savings
association that elects to use the CECL
transition provision must use the CECL
transition provision in the first Call
Report that includes CECL filed by the
national bank or Federal savings
association after it adopts CECL.
(3) A national bank or Federal savings
association that does not elect to use the
CECL transition provision as of the first
Call Report that includes CECL filed as
described in paragraph (a)(2) of this
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18:34 May 11, 2018
Jkt 244001
section may not elect to use the CECL
transition provision in subsequent
reporting periods.
(b) Definitions. For purposes of this
section, the following definitions apply:
(1) Transition period means the threeyear period (twelve quarters) beginning
the first day of the fiscal year in which
a national bank or Federal savings
association adopts CECL.
(2) CECL transitional amount means
the decrease net of any DTAs in the
amount of a national bank’s or Federal
savings association’s retained earnings
as of the beginning of the fiscal year in
which the national bank or Federal
savings association adopts CECL from
the amount of the national bank’s or
Federal savings association’s retained
earnings as of the closing of the fiscal
year-end immediately prior to the
national bank’s or Federal savings
association’s adoption of CECL.
(3) DTA transitional amount means
the increase in the amount of a national
bank’s or Federal savings association’s
DTAs arising from temporary
differences as of the beginning of the
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fiscal year in which the national bank or
Federal savings association adopts CECL
from the amount of the national bank’s
or Federal savings association’s DTAs
arising from temporary differences as of
the closing of the fiscal year-end
immediately prior to the national bank’s
or Federal savings association’s
adoption of CECL.
(4) ACL transitional amount means
the difference in the amount of a
national bank’s or Federal savings
association’s ACL as of the beginning of
the fiscal year in which the national
bank or Federal savings association
adopts CECL and the amount of the
national bank’s or Federal savings
association’s ALLL as of the closing of
the fiscal year-end immediately prior to
the national bank’s or Federal savings
association’s adoption of CECL.
(5) Eligible credit reserves transitional
amount means the increase in the
amount of a national bank’s or Federal
savings association’s eligible credit
reserves as of the beginning of the fiscal
year in which the national bank or
Federal savings association adopts CECL
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from the amount of the national bank’s
or Federal savings association’s eligible
credit reserves as of the closing of the
fiscal year-end immediately prior to the
national bank’s or Federal savings
association’s adoption of CECL.
(c) Calculation of CECL transition
provision. (1) For purposes of the
election described in paragraph (a)(1) of
this section, a national bank or Federal
savings association must make the
following adjustments in its calculation
of regulatory capital ratios:
(i) Increase retained earnings by
seventy-five percent of its CECL
transitional amount during the first year
of the transition period, increase
retained earnings by fifty percent of its
CECL transitional amount during the
second year of the transition period, and
increase retained earnings by twentyfive percent of its CECL transitional
amount during the third year of the
transition period;
(ii) Decrease amounts of DTAs arising
from temporary differences by seventyfive percent of its DTA transitional
amount during the first year of the
transition period, decrease amounts of
DTAs arising from temporary
differences by fifty percent of its DTA
transitional amount during the second
year of the transition period, and
decrease amounts of DTAs arising from
temporary differences by twenty-five
percent of its DTA transitional amount
during the third year of the transition
period;
(iii) Decrease amounts of ACL by
seventy-five percent of its ACL
transitional amount during the first year
of the transition period, decrease
amounts of ACL by fifty percent of its
ACL transitional amount during the
second year of the transition period, and
decrease amounts of ACL by twenty-five
percent of its ACL transitional amount
during the third year of the transition
period; and
(iv) Increase average total
consolidated assets as reported on the
Call Report for purposes of the leverage
ratio by seventy-five percent of its CECL
transitional amount during the first year
of the transition period, increase average
total consolidated assets as reported on
the Call Report for purposes of the
leverage ratio by fifty percent of its
CECL transitional amount during the
second year of the transition period, and
increase average total consolidated
assets as reported on the Call Report for
purposes of the leverage ratio twentyfive percent of its CECL transitional
amount during the third year of the
transition period.
(2) For purposes of the election
described in paragraph (a)(1) of this
section, an advanced approaches
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national bank or Federal savings
association must make the following
additional adjustments to its calculation
of regulatory capital ratios:
(i) Increase total leverage exposure for
purposes of the supplementary leverage
ratio by seventy-five percent of its CECL
transitional amount during the first year
of the transition period, increase total
leverage exposure for purposes of the
supplementary leverage ratio by fifty
percent of its CECL transitional amount
during the second year of the transition
period, and increase total leverage
exposure for purposes of the
supplementary leverage ratio by twentyfive percent of its CECL transitional
amount during the third year of the
transition period; and
(ii) An advanced approaches national
bank or Federal savings association that
has completed the parallel run process
and that has received notification from
the OCC pursuant to § 3.121(d) must
decrease amounts of eligible credit
reserves by seventy-five percent of its
eligible credit reserves transitional
amount during the first year of the
transition period, decrease amounts of
eligible credit reserves by fifty percent
of its eligible credit reserves transitional
amount during the second year of the
transition provision, and decrease
amounts of eligible credit reserves by
twenty-five percent of its eligible credit
reserves transitional amount during the
third year of the transition period.
(3) A national bank or Federal savings
association that has completed the
parallel run process and that has
received notification from the OCC
pursuant to § 3.121(d), and whose
amount of expected credit loss exceeded
its eligible credit reserves immediately
prior to the adoption of CECL, and that
this has an increase in common equity
tier 1 capital as of the beginning of the
fiscal year in which it adopts CECL after
including the first year portion of the
CECL transitional amount must decrease
its CECL transitional amount used in
paragraph (c) of this section by the full
amount of its DTA transitional amount.
(4) Notwithstanding any other
requirement in this section, for purposes
of this paragraph (c)(4), in the event of
a business combination involving a
national bank or Federal savings
association where one or both of the
national bank or Federal savings
association have elected the treatment
described in this section:
(i) If the acquirer national bank or
Federal savings association (as
determined under GAAP) elected the
treatment described in this section, the
acquirer national bank or Federal
savings association must continue to use
the transitional amounts (unaffected by
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the business combination) that it
calculated as of the date that it adopted
CECL through the end of its transition
period.
(ii) If the acquired insured depository
institution (as determined under GAAP)
elected the treatment described in this
section, any transitional amount of the
acquired insured depository institution
does not transfer to the resulting
national bank or Federal savings
association.
PART 5—RULES, POLICIES, AND
PROCEDURES FOR CORPORATE
ACTIVITIES
10. The authority citation for part 5
continues to read as follows:
■
Authority: 12 U.S.C. 1 et seq., 24a, 93a,
215a–2, 215a–3, 481, 1462a, 1463, 1464, 2901
et seq., 3907, and 5412(b)(2)(B).
11. Section 5.3 is amended by revising
paragraph (e)(2) to read as follows:
■
§ 5.3
Definitions.
*
*
*
*
*
(e) * * *
(2) The balance of a national bank’s or
Federal savings association’s allowance
for loan and lease losses or allowance
for credit losses, as applicable, not
included in the bank’s Tier 2 capital, for
purposes of the calculation of risk-based
capital described in paragraph (e)(1) of
this section, as reported in the Call
Report.
*
*
*
*
*
■ 12. Section 5.37 is amended by
revising paragraph (c)(3)(ii) to read as
follows:
§ 5.37 Investment in national bank or
Federal savings association premises.
*
*
*
*
*
(c) * * *
(3) * * *
(ii) The balance of a national bank’s
or Federal savings association’s
allowance for loan and lease losses or
allowance for credit losses, as
applicable, not included in the bank’s
Tier 2 capital, for purposes of the
calculation of risk-based capital
described in paragraph (c)(3)(i) of this
section, as reported in the Call Report.
*
*
*
*
*
PART 23—LEASING
13. The authority citation for part 23
continues to read as follows:
■
Authority: 12 U.S.C. 1 et seq., 24(Seventh),
24(Tenth), and 93a.
14. Section 23.2 is amended by
revising paragraph (b)(2) to read as
follows:
■
§ 23.2
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(b) * * *
(2) The balance of a bank’s allowance
for loan and lease losses or allowance
for credit losses, as applicable, not
included in the bank’s Tier 2 capital, for
purposes of the calculation of risk-based
capital described in paragraph (b)(1) of
this section, as reported in the bank’s
Call Report.
*
*
*
*
*
Authority: 12 U.S.C. 1 et seq., 25b, 29, 93a,
371, 1462a, 1463, 1464, 1465, 1701j–3,
1828(o), 3331 et seq., 5101 et seq., and
5412(b)(2)(B) and 15 U.S.C. 1639h.
20. Section 34.81 is amended by
revising paragraph (a)(2) to read as
follows:
■
§ 34.81
Definitions.
15. The authority citation for part 24
continues to read as follows:
(a) * * *
(2) The balance of a bank’s allowance
for loan and lease losses or allowance
for credit losses, as applicable, not
included in the bank’s Tier 2 capital, for
purposes of the calculation of risk-based
capital described in paragraph (a)(1) of
this section, as reported in the bank’s
Call Report.
*
*
*
*
*
Authority: 12 U.S.C. 24(Eleventh), 93a, 481
and 1818.
PART 46—ANNUAL STRESS TEST
PART 24—COMMUNITY AND
ECONOMIC DEVELOPMENT ENTITIES,
COMMUNITY DEVELOPMENT
PROJECTS, AND OTHER PUBLIC
WELFARE INVESTMENTS
■
16. Section 24.2 is amended by
revising paragraph (b)(2) to read as
follows:
21. The authority citation for part 46
continues to read as follows:
■
§ 24.2
Authority: 12 U.S.C. 93a; 1463(a)(2);
5365(i)(2); and 5412(b)(2)(B).
Definitions.
*
*
*
*
(b) * * *
(2) The balance of a bank’s allowance
for loan and lease losses or allowance
for credit losses, as applicable, not
included in the bank’s Tier 2 capital, for
purposes of the calculation of risk-based
capital described in paragraph (b)(1) of
this section, as reported in the bank’s
Call Report.
*
*
*
*
*
17. The authority citation for part 32
continues to read as follows:
■
Authority: 12 U.S.C. 1 et seq., 12 U.S.C.
84, 93a, 1462a, 1463, 1464(u), 5412(b)(2)(B),
and 15 U.S.C. 1639h.
18. Section 32.2 is amended by
revising paragraph (c)(2) to read as
follows:
■
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*
(c) * * *
(2) The balance of a national bank’s or
savings association’s allowance for loan
and lease losses or allowance for credit
losses, as applicable, not included in the
bank’s Tier 2 capital, for purposes of the
calculation of risk-based capital
described in paragraph (c)(1) of this
section, as reported in the bank’s Call
Report.
*
*
*
*
*
19. The authority citation for part 32
continues to read as follows:
■
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§ 46.8
[Amended]
22. Section 46.8 is amended by
removing the phrase ‘‘loan and lease’’
and adding in its place ‘‘credit’’
wherever that phrase appears.
■
25. The authority citation for part 211
continues to read as follows:
■
Authority: 12 U.S.C. 221 et seq., 1818,
1835a,1841 et seq., 3101 et seq., 3901 et seq.,
and 5101 et seq.; 15 U.S.C. 1681s, 1681w,
6801 and 6805.
Subpart A—International Operations of
U.S. Banking Organizations
26. In § 211.2, revise paragraph (c)(1)
to read as follows:
■
§ 211.2
Definitions.
PART 208—MEMBERSHIP OF STATE
BANKING INSTITUTIONS IN THE
FEDERAL RESERVE SYSTEM
(REGULATION H)
*
*
*
*
(c) Capital and surplus means, unless
otherwise provided in this part:
(1) For organizations subject to 12
CFR part 217 (Regulation Q):
(i) Tier 1 and tier 2 capital included
in an organization’s risk-based capital
(under Regulation Q); and
(ii) The balance of allowance for loan
and lease losses or allowance for credit
losses, as applicable, not included in an
organization’s tier 2 capital for
calculation of risk-based capital, based
on the organization’s most recent
consolidated Report of Condition and
Income.
*
*
*
*
*
Subpart D—International Lending
Supervision
Board of Governors of the Federal
Reserve System
12 CFR Chapter II
Authority and Issuance
For the reasons set forth in the
preamble, chapter II of title 12 of the
Code of Federal Regulations is proposed
to be amended as follows:
■
Definitions.
PART 34—REAL ESTATE LENDING
AND APPRAISALS
PART 211—INTERNATIONAL
BANKING OPERATIONS
(REGULATION K)
23. The authority citation for part 208
continues to read as follows:
PART 32—LENDING LIMITS
*
(as defined in § 217.2 of this chapter);
and
(2) The balance of a member bank’s
allowance for loan and lease losses or
allowance for credit losses, as
applicable, not included in its tier 2
capital for calculation of risk-based
capital, based on the bank’s most recent
Report of Condition and Income filed
under 12 U.S.C. 324.
*
*
*
*
*
■
*
§ 32.2
22329
Authority: 12 U.S.C. 24, 36, 92a, 93a,
248(a), 248(c), 321–338a, 371d, 461, 481–486,
601, 611, 1814, 1816, 1818, 1820(d)(9),
1833(j), 1828(o), 1831, 1831o, 1831p–1,
1831r–1, 1831w, 1831x, 1835a, 1882, 2901–
2907, 3105, 3310, 3331–3351, 3905–3909,
and 5371; 15 U.S.C. 78b, 78I(b), 78l(i), 780–
4(c)(5), 78q, 78q–1, and 78w, 1681s, 1681w,
6801, and 6805; 31 U.S.C. 5318; 42 U.S.C.
4012a, 4104a, 4104b, 4106 and 4128.
24. In § 208.2, paragraph (d) is revised
to read as follows:
■
§ 208.2
Definitions.
*
*
*
*
*
(d) Capital stock and surplus means,
unless otherwise provided in this part,
or by statute:
(1) Tier 1 and tier 2 capital included
in a member bank’s risk-based capital
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*
27. In § 211.43, revise paragraph (c)(4)
to read as follows:
■
§ 211.43
Allocated transfer risk reserve.
*
*
*
*
*
(c) * * *
(4) Alternative accounting treatment.
A banking institution is not required to
establish an ATRR if it writes down in
the period in which the ATRR is
required, or has written down in prior
periods, the value of the specified
international assets in the requisite
amount for each such asset. For
purposes of this paragraph (c)(4),
international assets may be written
down by a charge to the Allowance for
Loan and Lease Losses or the allowance
for credit losses, as applicable, to the
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extent permitted under U.S. generally
accepted accounting principles, or a
reduction in the principal amount of the
asset by application of interest
payments or other collections on the
asset. However, the Allowance for Loan
and Lease Losses or allowance for credit
losses, as applicable, must be
replenished in such amount necessary
to restore it to a level which adequately
provides for the estimated losses
inherent in the banking institution’s
loan portfolio.
*
*
*
*
*
PART 215—LOANS TO EXECUTIVE
OFFICERS, DIRECTORS, AND
PRINCIPAL SHAREHOLDERS OF
MEMBER BANKS (REGULATION O)
28. The authority citation for part 215
continues to read as follows:
■
Authority: 12 U.S.C. 248(a), 375a(10),
375b(9) and (10), 1468, 1817(k), 5412; and
Pub. L. 102–242, 105 Stat. 2236 (1991).
29. In § 215.2, revise paragraph (i)(2)
to read as follows:
■
§ 215.2
Definitions.
*
*
*
*
*
(i) * * *
(2) The balance of the bank’s
allowance for loan and lease losses or
allowance for credit losses, as
applicable, not included in the bank’s
tier 2 capital for purposes of the
calculation of risk-based capital under
the capital rules of the appropriate
Federal banking agency, based on the
bank’s most recent consolidated reports
of condition filed under 12 U.S.C.
1817(a)(3).
*
*
*
*
*
PART 217—CAPITAL ADEQUACY OF
BANK HOLDING COMPANIES,
SAVINGS AND LOAN HOLDING
COMPANIES, AND STATE MEMBER
BANKS (REGULATION Q)
30. The authority citation for part 217
continues to read as follows:
■
Authority: 12 U.S.C. 248(a), 321–338a,
481–486, 1462a, 1467a, 1818, 1828, 1831n,
1831o, 1831p–l, 1831w, 1835, 1844(b), 1851,
3904, 3906–3909, 4808, 5365, 5368, 5371.
31. In § 217.2:
a. Add the definition of Allowance for
credit losses (ACL) in alphabetical order;
■ b. Revise the definition of Carrying
value;
■ c. Add the definition of Current
expected credit losses (CECL) in
alphabetical order; and
■ d. Revise the definition of Eligible
credit reserves and paragraph (2) of the
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■
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definition of Standardized total riskweighted assets.
The additions and revisions read as
follows:
§ 217.2
Definitions.
*
*
*
*
*
Allowance for credit losses (ACL)
means, with respect to a Boardregulated institution that has adopted
CECL, valuation allowances that have
been established through a charge
against earnings or retained earnings for
expected credit losses on financial
assets measured at amortized cost and a
lessor’s net investment in leases that
have been established to reduce the
amortized cost basis of the assets to
amounts expected to be collected as
determined in accordance with GAAP.
For purposes of this part, allowance for
credit losses includes allowances for
expected credit losses on off-balance
sheet credit exposures not accounted for
as insurance as determined in
accordance with GAAP. Allowance for
credit losses excludes ‘‘allocated
transfer risk reserves’’ and allowances
created that reflect credit losses on
purchased credit-deteriorated assets and
available-for-sale debt securities.
*
*
*
*
*
Carrying value means, with respect to
an asset, the value of the asset on the
balance sheet of a Board-regulated
institution as determined in accordance
with GAAP. For all assets other than
available-for-sale debt securities or
purchased credit-deteriorated assets, the
carrying value is not reduced by any
associated credit loss allowance that is
determined in accordance with GAAP.
*
*
*
*
*
Current expected credit losses (CECL)
means the current expected credit losses
methodology under GAAP.
*
*
*
*
*
Eligible credit reserves means:
(1) For a Board-regulated institution
that has not adopted CECL, all general
allowances that have been established
through a charge against earnings to
cover estimated credit losses associated
with on- or off-balance sheet wholesale
and retail exposures, including the
ALLL associated with such exposures,
but excluding allocated transfer risk
reserves established pursuant to 12
U.S.C. 3904 and other specific reserves
created against recognized losses; and
(2) For a Board-regulated institution
that has adopted CECL, all general
allowances that have been established
through a charge against earnings or
retained earnings to cover expected
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credit losses associated with on- or offbalance sheet wholesale and retail
exposures, including ACL associated
with such exposures. Eligible credit
reserves exclude allocated transfer risk
reserves established pursuant to 12
U.S.C. 3904, allowances that reflect
credit losses on purchased creditdeteriorated assets and available-for-sale
debt securities, and other specific
reserves created against recognized
losses.
*
*
*
*
*
Standardized total risk-weighted
assets * * *
(2) Any amount of the Boardregulated institution’s allowance for
loan and lease losses or allowance for
credit losses, as applicable, that is not
included in tier 2 capital and any
amount of ‘‘allocated transfer risk
reserves.’’
*
*
*
*
*
§ 217.10
[Amended]
32. In § 217.10(c)(3)(ii)(A), remove the
words ‘‘allowance for loan and lease
losses’’ and add in their place the words
‘‘allowance for loan and lease losses or
allowance for credit losses, as
applicable,’’.
■
§§ 217.20(d)(3), 217.22, and 217.124
[Amended]
33. In §§ 217.20, 217.22, and 217.124,
remove ‘‘ALLL’’ everywhere it appears
and add in its place ‘‘ALLL or ACL, as
applicable,’’.
■
§ 217.63
[Amended]
34. In Table 5 to § 217.63, remove
‘‘allowance for loan and lease losses,’’
and ‘‘allowance for loan and lease
losses’’ and add in their place
‘‘allowance for loan and lease losses or
allowance for credit losses, as
applicable,’’ and remove ‘‘ALLL’’ and
add in its place ‘‘ALLL or ACL, as
applicable’’.
■
■
35. Amend § 217.173 as follows:
■
a. In Table 2, add paragraph (e);
b. In Table 3, revise paragraph (e),
redesignate paragraph (f) as paragraph
(g), and add a new paragraph (f); and
■
c. In Table 5, revise paragraphs (a), (e),
and (g).
■
The additions and revisions read as
follows:
§ 217.173 Disclosures by certain advanced
approaches Board-regulated institutions.
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TABLE 2 TO § 217.173—CAPITAL STRUCTURE
*
*
(e) .....................
*
*
*
*
*
(1) Whether the Board-regulated institution has elected to phase in recognition of the transitional amounts
as defined in § 217.300(f).
(2) The Board-regulated institution’s common equity tier 1 capital, tier 1 capital, and total capital without including the transitional amounts as defined in § 217.300(f).
TABLE 3 TO § 217.173—CAPITAL ADEQUACY
*
*
(e) .....................
(f) ......................
*
*
*
*
*
*
*
*
(1) Common equity tier 1, tier 1 and total risk-based capital ratios reflecting the transition provisions described in § 217.300(f):
(A) For the top consolidated group; and
(2) For each depository institution subsidiary.
Common equity tier 1, tier 1 and total risk-based capital ratios reflecting the full adoption of CECL:
(1) For the top consolidated group; and
(2) For each depository institution subsidiary.
*
*
*
*
*
*
*
*
*
TABLE 5 1 TO § 217.173—CREDIT RISK: GENERAL DISCLOSURES
Qualitative disclosures.
(a) .....................
The general qualitative disclosure requirement with respect to credit risk (excluding counterparty credit risk
disclosed in accordance with Table 7 to § 217.173), including:
(1) Policy for determining past due or delinquency status;
(2) Policy for placing loans on nonaccrual;
(3) Policy for returning loans to accrual status;
(4) Definition of and policy for identifying impaired loans (for financial accounting purposes);
(5) Description of the methodology that the entity uses to estimate its allowance for loan and lease
losses or allowance for credit losses, as applicable, including statistical methods used where applicable;
(6) Policy for charging-off uncollectible amounts; and
(7) Discussion of the Board-regulated institution’s credit risk management policy.
*
*
(e) .....................
*
*
*
*
*
By major industry or counterparty type:
(1) Amount of impaired loans for which there was a related allowance under GAAP;
(2) Amount of impaired loans for which there was no related allowance under GAAP;
(3) Amount of loans past due 90 days and on nonaccrual;
(4) Amount of loans past due 90 days and still accruing; 4
(5) The balance in the allowance for loan and lease losses or allowance for credit losses, as applicable, at the end of each period, disaggregated on the basis of the entity’s impairment method. To
disaggregate the information required on the basis of impairment methodology, an entity shall separately disclose the amounts based on the requirements in GAAP; and
(6) Charge-offs during the period.
*
*
(g) .....................
*
*
*
Reconciliation of changes in ALLL or ACL, as applicable.6
*
*
*
*
*
*
*
*
*
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5 to § 217.173 does not cover equity exposures, which should be reported in Table 9.
*
*
*
*
*
*
*
4 A Board-regulated institution is encouraged also to provide an analysis of the aging of past-due loans.
*
*
*
*
*
*
*
6 The reconciliation should include the following: a description of the allowance; the opening balance of the allowance; charge-offs taken
against the allowance during the period; amounts provided (or reversed) for estimated probable loan losses during the period; any other adjustments (for example, exchange rate differences, business combinations, acquisitions and disposals of subsidiaries), including transfers between
allowances; and the closing balance of the allowance. Charge-offs and recoveries that have been recorded directly to the income statement
should be disclosed separately.
*
■
*
*
*
*
36. Add § 217.301 to read as follows:
§ 217.301 Current expected credit losses
(CECL) transition.
(a) CECL transition provision—(1) A
Board-regulated institution may elect to
use a CECL transition provision
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pursuant to this section only if the
Board-regulated institution records a
reduction in retained earnings due to
the adoption of CECL as of the
beginning of the fiscal year in which the
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Board-regulated institution adopts
CECL.
(2) A Board-regulated institution that
elects to use the CECL transition
provision must use the CECL transition
provision in the first Call Report or
FR Y–9C that includes CECL filed by the
Board-regulated institution after it
adopts CECL.
(3) A Board-regulated institution that
does not elect to use the CECL transition
provision as of the first Call Report or
FR Y–9C that includes CECL filed as
described in paragraph (a)(2) of this
section may not elect to use the CECL
transition provision in subsequent
reporting periods.
(b) Definitions. For purposes of this
section, the following definitions apply:
(1) Transition period means the threeyear period (twelve quarters) beginning
the first day of the fiscal year in which
a Board-regulated institution adopts
CECL.
(2) CECL transitional amount means
the decrease net of any DTAs in the
amount of a Board-regulated
institution’s retained earnings as of the
beginning of the fiscal year in which the
Board-regulated institution adopts CECL
from the amount of the Board-regulated
institution’s retained earnings as of the
closing of the fiscal year-end
immediately prior to the Boardregulated institution’s adoption of
CECL.
(3) DTA transitional amount means
the increase in the amount of a Boardregulated institution’s DTAs arising
from temporary differences as of the
beginning of the fiscal year in which the
Board-regulated institution adopts CECL
from the amount of the Board-regulated
institution’s DTAs arising from
temporary differences as of the closing
of the fiscal year-end immediately prior
to the Board-regulated institution’s
adoption of CECL.
(4) ACL transitional amount means
the difference in the amount of a Boardregulated institution’s ACL as of the
beginning of the fiscal year in which the
Board-regulated institution adopts CECL
and the amount of the Board-regulated
institution’s ALLL as of the closing of
the fiscal year-end immediately prior to
the Board-regulated institution’s
adoption of CECL.
(5) Eligible credit reserves transitional
amount means the increase in the
amount of a Board-regulated
institution’s eligible credit reserves as of
the beginning of the fiscal year in which
the Board-regulated institution adopts
CECL from the amount of the Boardregulated institution’s eligible credit
reserves as of the closing of the fiscal
year-end immediately prior to the
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Board-regulated institution’s adoption
of CECL.
(c) Calculation of CECL transition
provision. (1) For purposes of the
election described in paragraph (a)(1) of
this section, a Board-regulated
institution must make the following
adjustments in its calculation of
regulatory capital ratios:
(i) Increase retained earnings by
seventy-five percent of its CECL
transitional amount during the first year
of the transition period, increase
retained earnings by fifty percent of its
CECL transitional amount during the
second year of the transition period, and
increase retained earnings by twentyfive percent of its CECL transitional
amount during the third year of the
transition period;
(ii) Decrease amounts of DTAs arising
from temporary differences by seventyfive percent of its DTA transitional
amount during the first year of the
transition period, decrease amounts of
DTAs arising from temporary
differences by fifty percent of its DTA
transitional amount during the second
year of the transition period, and
decrease amounts of DTAs arising from
temporary differences by twenty-five
percent of its DTA transitional amount
during the third year of the transition
period;
(iii) Decrease amounts of ACL by
seventy-five percent of its ACL
transitional amount during the first year
of the transition period, decrease
amounts of ACL by fifty percent of its
ACL transitional amount during the
second year of the transition period, and
decrease amounts of ACL by twenty-five
percent of its ACL transitional amount
during the third year of the transition
period; and
(iv) Increase average total
consolidated assets as reported on the
Call Report or FR Y–9C for purposes of
the leverage ratio by seventy-five
percent of its CECL transitional amount
during the first year of the transition
period, increase average total
consolidated assets as reported on the
Call Report or FR Y–9C for purposes of
the leverage ratio by fifty percent of its
CECL transitional amount during the
second year of the transition period, and
increase average total consolidated
assets as reported on the Call Report or
FR Y–9C for purposes of the leverage
ratio twenty-five percent of its CECL
transitional amount during the third
year of the transition period.
(2) For purposes of the election
described in paragraph (a)(1) of this
section, an advanced approaches Boardregulated institution must make the
following additional adjustments to its
calculation of regulatory capital ratios:
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(i) Increase total leverage exposure for
purposes of the supplementary leverage
ratio by seventy-five percent of its CECL
transitional amount during the first year
of the transition period, increase total
leverage exposure for purposes of the
supplementary leverage ratio by fifty
percent of its CECL transitional amount
during the second year of the transition
period, and increase total leverage
exposure for purposes of the
supplementary leverage ratio by twentyfive percent of its CECL transitional
amount during the third year of the
transition period; and
(ii) An advanced approaches Boardregulated institution that has completed
the parallel run process and has
received notification from the Board
pursuant to § 217.121(d) must decrease
amounts of eligible credit reserves by
seventy-five percent of its eligible credit
reserves transitional amount during the
first year of the transition period,
decrease amounts of eligible credit
reserves by fifty percent of its eligible
credit reserves transitional amount
during the second year of the transition
provision, and decrease amounts of
eligible credit reserves by twenty-five
percent of its eligible credit reserves
transitional amount during the third
year of the transition period.
(3) An advanced approaches Boardregulated institution that has completed
the parallel run process and has
received notification from the Board
pursuant to § 217.121(d), whose amount
of expected credit loss exceeded its
eligible credit reserves immediately
prior to the adoption of CECL, and that
has an increase in common equity tier
1 capital as of the beginning of the fiscal
year in which it adopts CECL after
including the first year portion of the
CECL transitional amount must decrease
its CECL transitional amount used in
paragraph (c) of this section by the full
amount of its DTA transitional amount.
(4) Notwithstanding any other
requirement in this section, for purposes
of this paragraph (c)(4), in the event of
a business combination involving
Board-regulated institutions where one
or both Board-regulated institutions
have elected the treatment described in
this section:
(i) If the acquirer Board-regulated
institution (as determined under GAAP)
elected the treatment described in this
section, the acquirer Board-regulated
institution must continue to use the
transitional amounts (unaffected by the
business combination) that it calculated
as of the date that it adopted CECL
through the end of its transition period.
(ii) If the acquired company (as
determined under GAAP) elected the
treatment described in this section, any
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The revision reads as follows:
transitional amount of the acquired
company does not transfer to the
resulting Board-regulated institution.
PART 223—TRANSACTIONS
BETWEEN MEMBER BANKS AND
THEIR AFFILIATES (REGULATION W)
37. The authority citation for part 223
continues to read as follows:
■
Authority: 12 U.S.C. 371c(b)(1)(E),
(b)(2)(A), and (f), 371c–1(e), 1828(j), 1468(a),
and section 312(b)(2)(A) of the Dodd-Frank
Wall Street Reform and Consumer Protection
Act (12 U.S.C. 5412).
Subpart A—Introduction and
Definitions
38. In § 223.3, revise paragraph (d) to
read as follows:
■
§ 223.3 What are the meanings of the other
terms used in sections 23A and 23B and
this part?
*
*
*
*
*
(d) Capital stock and surplus means
the sum of:
(1) A member bank’s tier 1 and tier 2
capital under the capital rules of the
appropriate Federal banking agency,
based on the member bank’s most recent
consolidated Report of Condition and
Income filed under 12 U.S.C. 1817(a)(3);
(2) The balance of a member bank’s
allowance for loan and lease losses or
allowance for credit losses, as
applicable, not included in its tier 2
capital under the capital rules of the
appropriate Federal banking agency,
based on the member bank’s most recent
consolidated Report of Condition and
Income filed under 12 U.S.C. 1817(a)(3);
and
(3) The amount of any investment by
a member bank in a financial subsidiary
that counts as a covered transaction and
is required to be deducted from the
member bank’s capital for regulatory
capital purposes.
*
*
*
*
*
PART 225—BANK HOLDING
COMPANIES AND CHANGE IN BANK
CONTROL (REGULATION Y)
39. The authority citation for part 225
continues to read as follows:
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■
Authority: 12 U.S.C. 1817(j)(13), 1818,
1828(o), 1831i, 1831p–1831i, 1843(c)(8),
1844(b), 1972(1), 3106, 3108, 3310, 3331–
3351, 3906, 3907 and 3909; 15 U.S.C. 1681s,
1681w, 6801 and 6805.
40. In § 225.127:
a. Remove ‘‘225.25(b)(6)’’ everywhere
it appears and add in its place
‘‘225.28(b)(12)’’ and remove ‘‘§ 225.23’’
everywhere it appears and add in its
place ‘‘§ 225.23 or § 225.24’’; and
■ b. Revise paragraph (h).
■
■
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§ 225.127 Investments in corporations or
projects designed primarily to promote
community welfare.
*
*
*
*
*
(h) For purposes of paragraph (f) of
this section, five percent of the total
consolidated capital stock and surplus
of a bank holding company includes its
total investment in projects described in
paragraph (f) of this section, when
aggregated with similar types of
investments made by depository
institutions controlled by the bank
holding company. The term total
consolidated capital stock and surplus
of the bank holding company means
total equity capital and the allowance
for loan and lease losses or allowance
for credit losses, as applicable, based on
the bank holding company’s most recent
FR Y–9C (Consolidated Financial
Statements for Holding Companies) or
FR Y–9SP (Parent Company Only
Financial Statements for Small Holding
Companies).
PART 252—ENHANCED PRUDENTIAL
STANDARDS (REGULATION YY)
41. The authority citation for part 252
continues to read as follows:
■
Authority: 12 U.S.C. 321–338a, 481–486,
1467a, 1818, 1828, 1831n, 1831o, 1831p–l,
1831w, 1835, 1844(b), 1844(c), 3101 et seq.,
3101 note, 3904, 3906–3909, 4808, 5361,
5362, 5365, 5366, 5367, 5368, 5371.
Subpart B—Company-Run Stress Test
Requirements for Certain U.S. Banking
Organizations With Total Consolidated
Assets Over $10 Billion and Less Than
$50 Billion
42. In § 252.12, revise paragraph (m)
to read as follows:
■
§ 252.12
Definitions.
*
*
*
*
*
(m) Provision for credit losses means:
(1) Until December 31, 2019:
(i) With respect to a bank holding
company, savings and loan holding
company, or state member bank that has
not adopted the current expected credit
losses methodology under U.S.
generally accepted accounting
principles (GAAP), the provision for
loan and lease losses as reported on the
FR Y–9C (and as would be reported on
the FR Y–9C or Call Report, as
appropriate, in the current stress test
cycle); and,
(ii) With respect to a bank holding
company, savings and loan holding
company, or state member bank that has
adopted the current expected credit
losses methodology under GAAP, the
provision for loan and lease losses, as
would be calculated and reported on the
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FR Y–9C or Call Report, as appropriate,
by a bank holding company, savings and
loan holding company, or state member
bank that has not adopted the current
expected credit losses methodology
under GAAP; and
(2) Beginning January 1, 2020:
(i) With respect to a covered company
that has adopted the current expected
credit losses methodology under GAAP,
the provision for credit losses, as would
be reported by the bank holding
company, savings and loan holding
company, or state member bank on the
FR Y–9C or Call Report, as appropriate,
in the current stress test cycle; and
(ii) With respect to a bank holding
company, savings and loan holding
company, or state member bank that has
not adopted the current expected credit
losses methodology under GAAP, the
provision for loan and lease losses as
would be reported by the bank holding
company, savings and loan holding
company, or state member bank on the
FR Y–9C or Call Report, as appropriate,
in the current stress test cycle.
*
*
*
*
*
■ 43. In § 252.15, revise paragraphs
(a)(1) and (2) to read as follows:
§ 252.15
Methodologies and practices.
(a) * * *
(1) Losses, pre-provision net revenue,
provision for credit losses, and net
income; and
(2) The potential impact on the
regulatory capital levels and ratios
applicable to the covered bank, and any
other capital ratios specified by the
Board, incorporating the effects of any
capital action over the planning horizon
and maintenance of an allowance for
loan losses or allowance for credit
losses, as appropriate, for credit
exposures throughout the planning
horizon.
*
*
*
*
*
■ 44. In § 252.16, revise paragraph (b)(3)
to read as follows:
§ 252.16
Reports of stress test results.
*
*
*
*
*
(b) * * *
(3) For each quarter of the planning
horizon, estimates of aggregate losses,
pre-provision net revenue, provision for
credit losses, net income, and regulatory
capital ratios;
*
*
*
*
*
■ 45. In § 252.17, revise paragraphs
(b)(1)(iii)(C), (b)(3)(iii)(C), and (c)(1) to
read as follows:
§ 252.17
*
Disclosure of stress test results.
*
*
(b) * * *
(1) * * *
(iii) * * *
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(C) Provision for credit losses;
*
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(3) * * *
(iii) * * *
(C) Provision for credit losses;
*
*
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*
*
(c) * * *
(1) The disclosure of aggregate losses,
pre-provision net revenue, provision for
credit losses, and net income that is
required under paragraph (b) of this
section must be on a cumulative basis
over the planning horizon.
*
*
*
*
*
*
Subpart E—Supervisory Stress Test
Requirements for U.S. Bank Holding
Companies With $50 Billion or More in
Total Consolidated Assets and
Nonbank Financial Companies
Supervised by the Board
46. In § 252.42, revise paragraph (l) to
read as follows:
■
§ 252.42
Definitions.
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(l) Provision for credit losses means:
(1) Until December 31, 2019:
(i) With respect to a covered company
that has not adopted the current
expected credit losses methodology
under U.S. generally accepted
accounting principles (GAAP), the
provision for loan and lease losses as
reported on the FR Y–9C (and as would
be reported on the FR Y–9C in the
current stress test cycle); and
(ii) With respect to a covered
company that has adopted the current
expected credit losses methodology
under GAAP, the provision for loan and
lease losses, as would be calculated and
reported on the FR Y–9C by a covered
company that has not adopted the
current expected credit losses
methodology under GAAP; and
(2) Beginning January 1, 2020:
(i) With respect to a covered company
that has adopted the current expected
credit losses methodology under GAAP,
the provision for credit losses, as would
be reported by the covered company on
the FR Y–9C in the current stress test
cycle; and,
(ii) With respect to a covered
company that has not adopted the
current expected credit losses
methodology under GAAP, the
provision for loan and lease losses as
would be reported by the covered
company on the FR Y–9C in the current
stress test cycle.
*
*
*
*
*
■ 47. In § 252.45, revise paragraph (b)(2)
to read as follows:
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§ 252.45 Data and information required to
be submitted in support of the Board’s
analyses.
*
*
*
*
*
(b) * * *
(2) Project a company’s pre-provision
net revenue, losses, provision for credit
losses, and net income; and pro forma
capital levels, regulatory capital ratios,
and any other capital ratio specified by
the Board under the scenarios described
in § 252.44(b).
*
*
*
*
*
Subpart F—Company-Run Stress Test
Requirements for U.S. Bank Holding
Companies With $50 Billion or More in
Total Consolidated Assets and
Nonbank Financial Companies
Supervised by the Board
48. In § 252.52, revise paragraph (m)
to read as follows:
■
§ 252.52
Definitions.
*
*
*
*
*
(m) Provision for credit losses means:
(1) Until December 31, 2019:
(i) With respect to a covered company
that has not adopted the current
expected credit losses methodology
under GAAP, the provision for loan and
lease losses as reported on the FR Y–9C
(and as would be reported on the FR Y–
9C in the current stress test cycle); and
(ii) With respect to a covered
company that has adopted the current
expected credit losses methodology
under GAAP, the provision for loan and
lease losses, as would be calculated and
reported on the FR Y–9C by a covered
company that has not adopted the
current expected credit losses
methodology under GAAP; and
(2) Beginning January 1, 2020:
(i) With respect to a covered company
that has adopted the current expected
credit losses methodology under GAAP,
the provision for credit losses, as would
be reported by the covered company on
the FR Y–9C in the current stress test
cycle; and
(ii) With respect to a covered
company that has not adopted the
current expected credit losses
methodology under GAAP, the
provision for loan and lease losses as
would be reported by the covered
company on the FR Y–9C in the current
stress test cycle.
*
*
*
*
*
■ 49. In § 252.56, revise paragraphs
(a)(1) and (2) to read as follows:
§ 252.56
Methodologies and practices.
(a) * * *
(1) Losses, pre-provision net revenue,
provision for credit losses, and net
income; and
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(2) The potential impact on the
regulatory capital levels and ratios
applicable to the covered bank, and any
other capital ratios specified by the
Board, incorporating the effects of any
capital action over the planning horizon
and maintenance of an allowance for
loan losses or allowance for credit
losses, as appropriate, for credit
exposures throughout the planning
horizon.
*
*
*
*
*
■ 50. In § 252.58, revise paragraphs
(b)(2), (b)(3)(ii), and (c)(1)(ii) to read as
follows:
§ 252.58
Disclosure of stress test results.
*
*
*
*
*
(b) * * *
(2) A general description of the
methodologies used in the stress test,
including those employed to estimate
losses, revenues, provision for credit
losses, and changes in capital positions
over the planning horizon;
(3) * * *
(ii) Provision for credit losses,
realized losses or gains on available-forsale and held-to-maturity securities,
trading and counterparty losses or gains;
*
*
*
*
*
(c) * * *
(1) * * *
(ii) Provision for credit losses,
realized losses/gains on available-forsale and held-to-maturity securities,
trading and counterparty losses, and
other losses or gain;
*
*
*
*
*
Federal Deposit Insurance Corporation
12 CFR Chapter III
Authority and Issuance
For the reasons stated in the
preamble, the Federal Deposit Insurance
Corporation proposes to amend chapter
III of title 12, Code of Federal
Regulations as follows:
PART 324—CAPITAL ADEQUACY OF
FDIC-SUPERVISED INSTITUTIONS
51. The authority citation for part 324
continues to read as follows:
■
Authority: 12 U.S.C. 1815(a), 1815(b),
1816, 1818(a), 1818(b), 1818(c), 1818(t),
1819(Tenth), 1828(c), 1828(d), 1828(i),
1828(n), 1828(o), 1831o, 1835, 3907, 3909,
4808; 5371; 5412; Pub. L. 102–233, 105 Stat.
1761, 1789, 1790 (12 U.S.C. 1831n note); Pub.
L. 102–242, 105 Stat. 2236, 2355, as amended
by Pub. L. 103–325, 108 Stat. 2160, 2233 (12
U.S.C. 1828 note); Pub. L. 102–242, 105 Stat.
2236, 2386, as amended by Pub. L. 102–550,
106 Stat. 3672, 4089 (12 U.S.C. 1828 note);
Pub. L. 111–203, 124 Stat. 1376, 1887 (15
U.S.C. 78o–7 note).
■
52. Section 324.2 is amended by:
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a. Adding the definition of Allowance
for credit losses (ACL) in alphabetical
order;
■ b. Revising the definitions of Carrying
value;
■ c. Adding the definition of Current
expected credit losses (CECL) in
alphabetical order; and
■ d. Revising the definitions of Eligible
credit reserves and Identified losses and
paragraph (2) of the definition of
Standardized total risk-weighted assets.
The additions and revisions read as
follows:
■
§ 324.2
Definitions.
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Allowance for credit losses (ACL)
means, with respect to an FDICsupervised institution that has adopted
CECL, valuation allowances that have
been established through a charge
against earnings or retained earnings for
expected credit losses on financial
assets measured at amortized cost and a
lessor’s net investment in leases that
have been established to reduce the
amortized cost basis of the assets to
amounts expected to be collected as
determined in accordance with GAAP.
For purposes of this part, allowance for
credit losses includes allowances for
expected credit losses on off-balance
sheet credit exposures not accounted for
as insurance as determined in
accordance with GAAP. Allowance for
credit losses excludes ‘‘allocated
transfer risk reserves’’ and allowances
created that reflect credit losses on
purchased credit-deteriorated assets and
available-for-sale debt securities.
*
*
*
*
*
Carrying value means, with respect to
an asset, the value of the asset on the
balance sheet of the FDIC-supervised
institution as determined in accordance
with GAAP. For all assets other than
available-for-sale debt securities or
purchased credit-deteriorated assets, the
carrying value is not reduced by any
associated credit loss allowance that is
determined in accordance with GAAP.
*
*
*
*
*
Current expected credit losses (CECL)
means the current expected credit losses
methodology under GAAP.
*
*
*
*
*
Eligible credit reserves means:
(1) For an FDIC-supervised institution
that has not adopted CECL, all general
allowances that have been established
through a charge against earnings to
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cover estimated credit losses associated
with on- or off-balance sheet wholesale
and retail exposures, including the
ALLL associated with such exposures,
but excluding allocated transfer risk
reserves established pursuant to 12
U.S.C. 3904 and other specific reserves
created against recognized losses; and
(2) For an FDIC-supervised institution
that has adopted CECL, all general
allowances that have been established
through a charge against earnings or
retained earnings to cover expected
credit losses associated with on- or offbalance sheet wholesale and retail
exposures, including ACL associated
with such exposures. Eligible credit
reserves exclude allocated transfer risk
reserves established pursuant to 12
U.S.C. 3904, allowances that reflect
credit losses on purchased creditdeteriorated assets and available-for-sale
debt securities, and other specific
reserves created against recognized
losses.
*
*
*
*
*
Identified losses means:
(1) When measured as of the date of
examination of an FDIC-supervised
institution, those items that have been
determined by an evaluation made by a
state or Federal examiner as of that date
to be chargeable against income, capital
and/or general valuation allowances
such as the allowances for loan and
lease losses (examples of identified
losses would be assets classified loss,
off-balance sheet items classified loss,
any provision expenses that are
necessary for the FDIC–supervised
institution to record in order to
replenish its general valuation
allowances to an adequate level,
liabilities not shown on the FDIC–
supervised institution’s books,
estimated losses in contingent
liabilities, and differences in accounts
which represent shortages) or the
allowance for credit losses; and
(2) When measured as of any other
date, those items:
(i) That have been determined—
(A) By an evaluation made by a state
or Federal examiner at the most recent
examination of an FDIC–supervised
institution to be chargeable against
income, capital and/or general valuation
allowances; or
(B) By evaluations made by the FDIC–
supervised institution since its most
recent examination to be chargeable
against income, capital and/or general
valuation allowances; and
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(ii) For which the appropriate
accounting entries to recognize the loss
have not yet been made on the FDIC–
supervised institution’s books nor has
the item been collected or otherwise
settled.
*
*
*
*
*
Standardized total risk-weighted
assets * * *
(2) Any amount of the FDIC–
supervised institution’s allowance for
loan and lease losses or allowance for
credit losses, as applicable, that is not
included in tier 2 capital and any
amount of ‘‘allocated transfer risk
reserves.’’
*
*
*
*
*
§ 324.10
[Amended]
53. Section 324.10(c)(3)(ii)(A) is
amended by removing the words
‘‘allowance for loan and lease losses’’
and adding in their place the words
‘‘allowance for loan and lease losses or
allowance for credit losses, as
applicable,’’.
■
§§ 324.20, 324.22, and 324.124
[Amended]
54. Sections 324.20, 324.22, and
324.124 are amended by removing
‘‘ALLL’’ everywhere it appears and
adding in its place ‘‘ALLL or ACL, as
applicable,’’, except the second
occurrence in § 324.20(d)(3) and in
§ 324.124(a) where ‘‘ALLL or ACL, as
applicable’’ is added in its place.
■
§ 324.63
[Amended]
55. Table 5 to § 324.63 is amended by
removing ‘‘allowance for loan and lease
losses,’’ and ‘‘allowance for loan and
lease losses’’ and adding in their place
‘‘allowance for loan and lease losses or
allowance for credit losses, as
applicable,’’ and removing ‘‘ALLL’’ and
adding in its place ‘‘ALLL or ACL, as
applicable’’.
■ 56. Section 324.173 is amended:
■ a. In Table 2, by adding paragraph (e);
■ b. In Table 3, by revising paragraph
(e), redesignating paragraph (f) as
paragraph (g), and adding a new
paragraph (f); and
■ c. In Table 5, by revising paragraphs
(a), (e), and (g).
The additions and revisions read as
follows:
■
§ 324.173 Disclosures by certain advanced
approaches FDIC-supervised institutions.
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TABLE 2 TO § 324.173—CAPITAL STRUCTURE
*
*
(e) .....................
*
*
*
*
*
(1) Whether the FDIC-supervised institution has elected to phase in recognition of the transitional amounts
as defined in § 324.300(f).
(2) The FDIC-supervised institution’s common equity tier 1 capital, tier 1 capital, and total capital without
including the transitional amounts as defined in § 324.300(f).
TABLE 3 TO § 324.173—CAPITAL ADEQUACY
*
*
(e) .....................
(f) ......................
*
*
*
*
*
*
*
*
(1) Common equity tier 1, tier 1 and total risk-based capital ratios reflecting the transition provisions described in § 324.300(f):
(A) For the top consolidated group; and
(2) For each depository institution subsidiary.
Common equity tier 1, tier 1 and total risk-based capital ratios reflecting the full adoption of CECL:
(1) For the top consolidated group; and
(2) For each depository institution subsidiary.
*
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*
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*
TABLE 51 TO § 324.173—CREDIT RISK: GENERAL DISCLOSURES
Qualitative disclosures.
(a) .....................
The general qualitative disclosure requirement with respect to credit risk (excluding counterparty credit risk
disclosed in accordance with Table 7 to § 324.173), including:
(1) Policy for determining past due or delinquency status;
(2) Policy for placing loans on nonaccrual;
(3) Policy for returning loans to accrual status;
(4) Definition of and policy for identifying impaired loans (for financial accounting purposes);
(5) Description of the methodology that the entity uses to estimate its allowance for loan and lease
losses or allowance for credit losses, as applicable, including statistical methods used where applicable;
(6) Policy for charging-off uncollectible amounts; and
(7) Discussion of the FDIC-supervised institution’s credit risk management policy.
*
*
(e) .....................
*
*
*
*
*
By major industry or counterparty type:
(1) Amount of impaired loans for which there was a related allowance under GAAP;
(2) Amount of impaired loans for which there was no related allowance under GAAP;
(3) Amount of loans past due 90 days and on nonaccrual;
(4) Amount of loans past due 90 days and still accruing; 4
(5) The balance in the allowance for loan and lease losses or allowance for credit losses, as applicable, at the end of each period, disaggregated on the basis of the entity’s impairment method. To
disaggregate the information required on the basis of impairment methodology, an entity shall separately disclose the amounts based on the requirements in GAAP; and
(6) Charge-offs during the period.
*
*
(g) .....................
*
*
*
Reconciliation of changes in ALLL or ACL, as applicable.6
*
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*
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*
*
*
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1 Table
5 to § 324.173 does not cover equity exposures, which should be reported in Table 9 to § 324.173.
*
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4 An FDIC-supervised institution is encouraged also to provide an analysis of the aging of past-due loans.
*
*
*
*
*
*
*
6 The reconciliation should include the following: A description of the allowance; the opening balance of the allowance; charge-offs taken
against the allowance during the period; amounts provided (or reversed) for estimated probable loan losses during the period; any other adjustments (for example, exchange rate differences, business combinations, acquisitions and disposals of subsidiaries), including transfers between
allowances; and the closing balance of the allowance. Charge-offs and recoveries that have been recorded directly to the income statement
should be disclosed separately.
*
■
*
*
*
*
57. Add § 324.301 to read as follows:
§ 324.301 Current expected credit losses
(CECL) transition.
(a) CECL transition provision—(1) An
FDIC-supervised institution may elect to
use a CECL transition provision
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pursuant to this section only if the
FDIC-supervised institution records a
reduction in retained earnings due to
the adoption of CECL as of the
beginning of the fiscal year in which the
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FDIC-supervised institution adopts
CECL.
(2) An FDIC-supervised institution
that elects to use the CECL transition
provision must use the CECL transition
provision in the first Call Report that
includes CECL filed by the FDICsupervised institution after it adopts
CECL.
(3) An FDIC-supervised institution
that does not elect to use the CECL
transition provision as of the first Call
Report that includes CECL filed as
described in paragraph (a)(2) of this
section may not elect to use the CECL
transition provision in subsequent
reporting periods.
(b) Definitions. For purposes of this
section, the following definitions apply:
(1) Transition period means the threeyear period (twelve quarters) beginning
the first day of the fiscal year in which
an FDIC-supervised institution adopts
CECL.
(2) CECL transitional amount means
the decrease net of any DTAs in the
amount of an FDIC-supervised
institution’s retained earnings as of the
beginning of the fiscal year in which the
FDIC-supervised institution adopts
CECL from the amount of the FDICsupervised institution’s retained
earnings as of the closing of the fiscal
year-end immediately prior to the FDICsupervised institution’s adoption of
CECL.
(3) DTA transitional amount means
the increase in the amount of an FDICsupervised institution’s DTAs arising
from temporary differences as of the
beginning of the fiscal year in which the
FDIC-supervised institution adopts
CECL from the amount of the FDICsupervised institution’s DTAs arising
from temporary differences as of the
closing of the fiscal year-end
immediately prior to the FDICsupervised institution’s adoption of
CECL.
(4) ACL transitional amount means
the difference in the amount of an FDICsupervised institution’s ACL as of the
beginning of the fiscal year in which the
FDIC-supervised institution adopts
CECL and the amount of the FDICsupervised institution’s ALLL as of the
closing of the fiscal year-end
immediately prior to the FDICsupervised institution’s adoption of
CECL.
(5) Eligible credit reserves transitional
amount means the increase in the
amount of a FDIC-supervised
institution’s eligible credit reserves as of
the beginning of the fiscal year in which
the FDIC-supervised institution adopts
CECL from the amount of the FDICsupervised institution’s eligible credit
reserves as of the closing of the fiscal
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18:34 May 11, 2018
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year-end immediately prior to the FDICsupervised institution’s adoption of
CECL.
(c) Calculation of CECL transition
provision. (1) For purposes of the
election described in paragraph (a)(1) of
this section, an FDIC-supervised
institution must make the following
adjustments in its calculation of
regulatory capital ratios:
(i) Increase retained earnings by
seventy-five percent of its CECL
transitional amount during the first year
of the transition period, increase
retained earnings by fifty percent of its
CECL transitional amount during the
second year of the transition period, and
increase retained earnings by twentyfive percent of its CECL transitional
amount during the third year of the
transition period;
(ii) Decrease amounts of DTAs arising
from temporary differences by seventyfive percent of its DTA transitional
amount during the first year of the
transition period, decrease amounts of
DTAs arising from temporary
differences by fifty percent of its DTA
transitional amount during the second
year of the transition period, and
decrease amounts of DTAs arising from
temporary differences by twenty-five
percent of its DTA transitional amount
during the third year of the transition
period;
(iii) Decrease amounts of ACL by
seventy-five percent of its ACL
transitional amount during the first year
of the transition period, decrease
amounts of ACL by fifty percent of its
ACL transitional amount during the
second year of the transition period, and
decrease amounts of ACL by twenty-five
percent of its ACL transitional amount
during the third year of the transition
period; and
(iv) Increase average total
consolidated assets as reported on the
Call Report for purposes of the leverage
ratio by seventy-five percent of its CECL
transitional amount during the first year
of the transition period, increase average
total consolidated assets as reported on
the Call Report for purposes of the
leverage ratio by fifty percent of its
CECL transitional amount during the
second year of the transition period, and
increase average total consolidated
assets as reported on the Call Report for
purposes of the leverage ratio twentyfive percent of its CECL transitional
amount during the third year of the
transition period.
(2) For purposes of the election
described in paragraph (a)(1) of this
section, an advanced approaches FDICsupervised institution must make the
following additional adjustments to its
calculation of regulatory capital ratios:
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22337
(i) Increase total leverage exposure for
purposes of the supplementary leverage
ratio by seventy-five percent of its CECL
transitional amount during the first year
of the transition period, increase total
leverage exposure for purposes of the
supplementary leverage ratio by fifty
percent of its CECL transitional amount
during the second year of the transition
period, and increase total leverage
exposure for purposes of the
supplementary leverage ratio by twentyfive percent of its CECL transitional
amount during the third year of the
transition period; and
(ii) An advanced approaches FDICsupervised institution that has
completed the parallel run process and
has received notification from the FDIC
pursuant to § 324.121(d) must decrease
amounts of eligible credit reserves by
seventy-five percent of its eligible credit
reserves transitional amount during the
first year of the transition period,
decrease amounts of eligible credit
reserves by fifty percent of its eligible
credit reserves transitional amount
during the second year of the transition
provision, and decrease amounts of
eligible credit reserves by twenty-five
percent of its eligible credit reserves
transitional amount during the third
year of the transition period.
(3) An advanced approaches FDICsupervised institution that has
completed the parallel run process and
has received notification from the FDIC
pursuant to § 324.121(d), whose amount
of expected credit loss exceeded its
eligible credit reserves immediately
prior to the adoption of CECL, and that
has an increase in common equity tier
1 capital as of the beginning of the fiscal
year in which it adopts CECL after
including the first year portion of the
CECL transitional amount must decrease
its CECL transitional amount used in
paragraph (c) of this section by the full
amount of its DTA transitional amount.
(4) Notwithstanding any other
requirement in this section, for purposes
of this paragraph (c)(4), in the event of
a business combination involving FDICsupervised institutions where one or
both FDIC-supervised institutions have
elected the treatment described in this
section:
(i) If the acquirer FDIC-supervised
institution (as determined under GAAP)
elected the treatment described in this
section, the acquirer FDIC-supervised
institution must continue to use the
transitional amounts (unaffected by the
business combination) that it calculated
as of the date that it adopted CECL
through the end of its transition period.
(ii) If the acquired insured depository
institution (as determined under GAAP)
elected the treatment described in this
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section, any transitional amount of the
acquired insured depository institution
does not transfer to the resulting FDICsupervised institution.
PART 325—ANNUAL STRESS TEST
58. The authority citation for part 325
continues to read as follows:
■
Authority: 12 U.S.C. 5365(i)(2); 12 U.S.C.
5412(b)(2)(C); 12 U.S.C. 1818, 12 U.S.C.
1819(a)(Tenth), 12 U.S.C. 1831o, and 12
U.S.C. 1831p–1.
59. Section 325.2(g) is revised to read
as follows:
■
§ 325.2
Definitions.
*
*
*
*
*
(g) Provision for credit losses means:
(1) Until December 31, 2019:
(i) With respect to a state nonmember
bank or state savings association that
has not adopted the current expected
credit losses methodology under U.S.
generally accepted accounting
principles (GAAP), the provision for
loan and lease losses as reported on the
Call Report in the current stress test
cycle; and,
(ii) With respect to a state nonmember
bank or state savings association that
has adopted the current expected credit
losses methodology under GAAP, the
provision for loan and lease losses, as
would be calculated and reported on the
Call Report by a state nonmember bank
or state savings association that has not
adopted the current expected credit
losses methodology under GAAP; and
(2) Beginning January 1, 2020:
(i) With respect to a state nonmember
bank or state savings association that
has adopted the current expected credit
losses methodology under GAAP, the
provision for credit losses, as reported
in the Call Report in the current stress
test cycle; and
(ii) With respect to a state nonmember
bank or state savings association that
has not adopted the current expected
credit losses methodology under GAAP,
the provision for loan and lease losses
as would be reported in the Call Report
in the current stress test cycle.
*
*
*
*
*
■ 60. Section 325.5(a)(1) and (2) are
revised to read as follows:
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§ 325.6 Required reports of stress test
results to the FDIC and the Board of
Governors of the Federal Reserve System.
*
*
*
*
*
(b) * * *
(1) The reports required under
paragraph (a) of this section must
include under the baseline scenario,
adverse scenario, severely adverse
scenario and any other scenario
required by the FDIC under this part, a
description of the types of risks being
included in the stress test, a summary
description of the methodologies used
in the stress test, and, for each quarter
of the planning horizon, estimates of
aggregate losses, pre-provision net
revenue, provision for credit losses, net
income, and pro forma capital ratios
(including regulatory and any other
capital ratios specified by the FDIC). In
addition, the report must include an
explanation of the most significant
causes for the changes in regulatory
capital ratios and any other information
required by the FDIC.
*
*
*
*
*
■ 62. Section 325.7 is amended by
revising paragraphs (c)(3) and (d)(1) to
read as follows:
§ 325.7
Publication of stress test results.
*
*
*
*
*
(c) * * *
(3) Estimates of aggregate losses, preprovision net revenue, provision for
credit losses, net income, and pro forma
capital ratios (including regulatory and
any other capital ratios specified by the
FDIC); and
*
*
*
*
*
(d) * * *
(1) The disclosure of aggregate losses,
pre-provision net revenue, provisions
for credit losses, and net income under
this section must be on a cumulative
basis over the planning horizon.
*
*
*
*
*
PART 327—ASSESSMENTS
Methodologies and practices.
(a) * * *
(1) Pre-provision net revenues, losses,
provision for credit losses, and net
income; and
(2) The potential impact on the
regulatory capital levels and ratios
applicable to the covered bank, and any
other capital ratios specified by the
Corporation, incorporating the effects of
any capital action over the planning
VerDate Sep<11>2014
horizon and maintenance of an
allowance for loan losses or allowance
for credit losses, as appropriate, for
credit exposures throughout the
planning horizon.
*
*
*
*
*
■ 61. Section 325.6(b)(1) is revised to
read as follows:
63. The authority citation for part 327
continues to read as follows:
■
Authority: 12 U.S.C. 1441, 1813, 1815,
1817–19, 1821.
Subpart A—In General
§ 327.16
[Amended]
64. Section 327.16 is amended by
removing the words ‘‘allowance for loan
■
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Fmt 4701
Sfmt 4702
and lease financing receivable losses
(ALLL)’’ and adding in their place the
words ‘‘allowance for loan and lease
financing receivable losses (ALLL) or
allowance for credit losses, as
applicable’’.
PART 347—INTERNATIONAL
BANKING
65. The authority citation for part 347
continues to read as follows:
■
Authority: 12 U.S.C. 1813, 1815, 1817,
1819, 1820, 1828, 3103, 3104, 3105, 3108,
3109; Pub L. 111–203, section 939A, 124 Stat.
1376, 1887 (July 21, 2010) (codified 15 U.S.C.
78o–7 note).
Subpart C—International Lending
66. Section 347.303 is amended by
revising paragraphs (c)(2) and (4) to read
as follows:
■
§ 347.303
Allocated transfer risk reserve.
*
*
*
*
*
(c) * * *
(2) Separate accounting. A banking
institution shall account for an ATRR
separately from the Allowance for Loan
and Lease Losses or allowance for credit
losses, as applicable, and shall deduct
the ATRR from ‘‘gross loans and leases’’
to arrive at ‘‘net loans and lease.’’ The
ATRR must be established for each asset
subject to the ATRR in the percentage
amount specified.
*
*
*
*
*
(4) Alternative accounting treatment.
A banking institution need not establish
an ATRR if it writes down in the period
in which the ATRR is required, or has
written down in prior periods, the value
of the specified international assets in
the requisite amount for each such asset.
For purposes of this paragraph (c)(4),
international assets may be written
down by a charge to the Allowance for
Loan and Lease Losses or allowance for
credit losses, as applicable, or a
reduction in the principal amount of the
asset by application of interest
payments or other collections on the
asset; provided, that only those
international assets that may be charged
to the Allowance for Loan and Lease
Losses or allowance for credit losses, as
applicable, pursuant to U.S. generally
accepted accounting principles may be
written down by a charge to the
Allowance for Loan and Lease Losses or
allowance for credit losses, as
applicable. However, the Allowance for
Loan and Lease Losses or allowance for
credit losses, as applicable, must be
replenished in such amount necessary
to restore it to a level which adequately
provides for the estimated losses
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inherent in the banking institution’s
loan and lease portfolio.
*
*
*
*
*
Subpart T—Accounting Requirements
§ 390.384
[Amended]
68. In the appendix to § 390.384,
remove ‘‘provision for loan losses’’
everywhere it appears and add in its
place ‘‘provision for loan losses or
provision for credit losses, as
applicable’’.
■
PART 390—REGULATIONS
TRANSFERRED FROM THE OFFICE OF
THRIFT SUPERVISION
67. The authority citation for part 390
continues to read as follows:
■
Authority: 12 U.S.C. 1819.
22339
Dated: April 17, 2018.
Joseph M. Otting,
Comptroller of the Currency.
By order of the Board of Governors of the
Federal Reserve System, April 16, 2018.
Ann E. Misback,
Secretary of the Board.
Dated at Washington, DC this 17th day of
April, 2018.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Valerie Best,
Assistant Executive Secretary.
[FR Doc. 2018–08999 Filed 5–11–18; 8:45 am]
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]]>Agencies
[Federal Register Volume 83, Number 93 (Monday, May 14, 2018)]
[Proposed Rules]
[Pages 22312-22339]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-08999]
[[Page 22311]]
Vol. 83
Monday,
No. 93
May 14, 2018
Part II
Department of Treasury
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Office of the Comptroller of the Currency
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Federal Reserve System
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Federal Deposit Insurance Corporation
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12 CFR Parts 1, 3, 5, et al.
Regulatory Capital Rules: Implementation and Transition of the Current
Expected Credit Losses Methodology for Allowances and Related
Adjustments to the Regulatory Capital Rules and Conforming Amendments
to Other Regulations; Proposed Rules
Federal Register / Vol. 83 , No. 93 / Monday, May 14, 2018 / Proposed
Rules
[[Page 22312]]
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DEPARTMENT OF TREASURY
Office of the Comptroller of the Currency
12 CFR Parts 1, 3, 5, 23, 24, 32, 34, and 46
[Docket ID OCC-2018-0009]
RIN 1557-AE32
FEDERAL RESERVE SYSTEM
12 CFR Parts 208, 211, 215, 217, 223, 225, and 252
[Regulation Q; Docket No. R-1605]
RIN 7100-AF04
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Parts 324, 325, 327, 347, and 390
RIN 3064-AE74
Regulatory Capital Rules: Implementation and Transition of the
Current Expected Credit Losses Methodology for Allowances and Related
Adjustments to the Regulatory Capital Rules and Conforming Amendments
to Other Regulations
AGENCY: Office of the Comptroller of the Currency (OCC), the Board of
Governors of the Federal Reserve System (Board), and the Federal
Deposit Insurance Corporation (FDIC).
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Office of the Comptroller of the Currency, the Board of
Governors of the Federal Reserve System, and the Federal Deposit
Insurance Corporation (collectively, the agencies) are inviting public
comment on a joint proposal to address changes to U.S. generally
accepted accounting principles (U.S. GAAP) described in Accounting
Standards Update No. 2016-13, Topic 326, Financial Instruments--Credit
Losses (ASU 2016-13), including banking organizations' implementation
of the current expected credit losses methodology. Specifically, the
proposal would revise the agencies' regulatory capital rules to
identify which credit loss allowances under the new accounting standard
are eligible for inclusion in regulatory capital and to provide banking
organizations the option to phase in the day-one adverse effects on
regulatory capital that may result from the adoption of the new
accounting standard. The proposal also would amend certain regulatory
disclosure requirements to reflect applicable changes to U.S. GAAP
covered under ASU 2016-13. In addition, the agencies are proposing to
make amendments to their stress testing regulations so that covered
banking organizations that have adopted ASU 2016-13 would not include
the effect of ASU 2016-13 on their provisioning for purposes of stress
testing until the 2020 stress test cycle. Finally, the agencies are
proposing to make conforming amendments to their other regulations that
reference credit loss allowances.
DATES: Comments must be received by July 13, 2018.
ADDRESSES: Comments should be directed to:
OCC: You may submit comments to the OCC by any of the methods set
forth below. Commenters are encouraged to submit comments through the
Federal eRulemaking Portal or email, if possible. Please use the title
``Regulatory Capital Rules: Implementation and Transition of the
Current Expected Credit Losses Methodology for Allowances and Related
Adjustments to the Regulatory Capital Rules and Conforming Amendments
to Other Regulations'' to facilitate the organization and distribution
of the comments. You may submit comments by any of the following
methods:
Federal eRulemaking Portal--``Regulations.gov'': Go to
www.regulations.gov. Enter ``Docket ID OCC-2018-0009'' in the Search
Box and click ``Search.'' Click on ``Comment Now'' to submit public
comments.
Click on the ``Help'' tab on the Regulations.gov home page
to get information on using Regulations.gov, including instructions for
submitting public comments.
Email: [email protected].
Mail: Legislative and Regulatory Activities Division,
Office of the Comptroller of the Currency, 400 7th Street SW, suite 3E-
218, Washington, DC 20219.
Hand Delivery/Courier: 400 7th Street SW, suite 3E-218,
Washington, DC 20219.
Fax: (571) 465-4326.
Instructions: You must include ``OCC'' as the agency name and
``Docket ID OCC-2018-0009'' in your comment. In general, the OCC will
enter all comments received into the docket and publish them on the
Regulations.gov website without change, including any business or
personal information that you provide such as name and address
information, email addresses, or phone numbers. Comments received,
including attachments and other supporting materials, are part of the
public record and subject to public disclosure. Do not include any
information in your comment or supporting materials that you consider
confidential or inappropriate for public disclosure.
You may review comments and other related materials that pertain to
this rulemaking action by any of the following methods:
Viewing Comments Electronically: Go to
www.regulations.gov. Enter ``Docket ID OCC-2018-0009'' in the Search
box and click ``Search.'' Click on ``Open Docket Folder'' on the right
side of the screen. Comments and supporting materials can be viewed and
filtered by clicking on ``View all documents and comments in this
docket'' and then using the filtering tools on the left side of the
screen.
Click on the ``Help'' tab on the Regulations.gov home page
to get information on using Regulations.gov. The docket may be viewed
after the close of the comment period in the same manner as during the
comment period.
Viewing Comments Personally: You may personally inspect comments at
the OCC, 400 7th Street SW, Washington, DC 20219. For security reasons,
the OCC requires that visitors make an appointment to inspect comments.
You may do so by calling (202) 649-6700 or, for persons who are hearing
impaired, TTY, (202) 649-5597. Upon arrival, visitors will be required
to present valid government-issued photo identification and submit to
security screening in order to inspect comments.
Board: You may submit comments, identified by Docket No. R-1605 and
RIN 7100-AF04, by any of the following methods:
Agency Website: https://www.federalreserve.gov. Follow the
instructions for submitting comments at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Email: [email protected]. Include docket
number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Ann E. Misback, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue NW,
Washington, DC 20551. All public comments are available from the
Board's website at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, unless modified for technical reasons or
to remove sensitive PII at the commenter's request. Public comments may
also be viewed electronically or in paper form in Room 3515, 1801 K
Street NW (between 18th and 19th Streets NW), Washington, DC 20006
between 9:00 a.m. and 5:00 p.m. on weekdays.
[[Page 22313]]
FDIC: You may submit comments, identified by RIN 3064-AE74, by any
of the following methods:
Agency Website: https://www.fdic.gov/regulations/laws/federal/. Follow instructions for submitting comments on the Agency
website.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th
Street NW, Washington, DC 20429.
Hand Delivery/Courier: Comments may be hand-delivered to
the guard station at the rear of the 550 17th Street Building (located
on F Street) on business days between 7:00 a.m. and 5:00 p.m.
Email: [email protected]. Include RIN 3064-AE74 on the
subject line of the message.
Public Inspection: All comments received must include the
agency name and RIN 3064-AE74 for this rulemaking. All comments
received will be posted without change to https://www.fdic.gov/regulations/laws/federal/, including any personal information provided.
Paper copies of public comments may be ordered from the FDIC Public
Information Center, 3501 North Fairfax Drive, Room E-1002, Arlington,
VA 22226, or by telephone at (877) 275-3342 or (703) 562-2200.
FOR FURTHER INFORMATION CONTACT:
OCC: Mark Ginsberg, Senior Risk Expert, (202) 649-6983; or Kevin
Korzeniewski, Counsel, Legislative and Regulatory Activities Division,
(202) 649-5490; or for persons who are hearing impaired, TTY, (202)
649-5597.
Board: Constance M. Horsley, Deputy Associate Director, (202) 452-
5239; Juan Climent, Manager, (202) 872-7526; Andrew Willis, Senior
Supervisory Financial Analyst, (202) 912-4323; or Noah Cuttler, Senior
Financial Analyst, (202) 912-4678, Division of Supervision and
Regulation; or Benjamin W. McDonough, Assistant General Counsel, (202)
452-2036; David W. Alexander, Counsel, (202) 452-2877; or Asad Kudiya,
Senior Attorney, (202) 475-6358, Legal Division, Board of Governors of
the Federal Reserve System, 20th and C Streets NW, Washington, DC
20551. For the hearing impaired only, Telecommunication Device for the
Deaf, (202) 263-4869.
FDIC: Benedetto Bosco, Chief, [email protected]; David Riley, Senior
Policy Analyst, [email protected]; Richard Smith, Capital Markets Policy
Analyst, [email protected]; Michael Maloney, Senior Policy Analyst,
[email protected]; Capital Markets Branch, Division of Risk Management
Supervision, [email protected], (202) 898-6888; or Michael
Phillips, Acting Supervisory Counsel, [email protected]; Catherine
Wood, Counsel, [email protected]; or Benjamin Klein, Counsel,
[email protected]; Supervision Branch, Legal Division, Federal Deposit
Insurance Corporation, 550 17th Street NW, Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Overview of Changes to U.S. Generally Accepted Accounting
Principles
B. Regulatory Capital
II. Description of the Proposed Rule
A. Proposed Revisions to the Capital Rules To Reflect the Change
in U.S. GAAP
1. Introduction of Allowance for Credit Losses as a Newly
Defined Term
2. Definition of Carrying Value
i. Available-for-Sale Debt Securities
ii. Purchased Credit-Deteriorated Assets
3. Additional Considerations
B. CECL Transition Provision
1. Election of the Optional CECL Transition Provision
2. Mechanics of the CECL Transition Provision
3. CECL Transition Provision Time Period
4. Business Combinations
5. Supervisory Oversight
C. Additional Requirements for Advanced Approaches Banking
Organizations
D. Disclosures and Regulatory Reporting
E. Conforming Changes to Other Agency Regulations
1. OCC Regulations
2. Board Regulations
3. FDIC Regulations
F. Additional Requests for Comments
III. Regulatory Analyses
A. Paperwork Reduction Act
B. Regulatory Flexibility Act
C. Plain Language
D. OCC Unfunded Mandates Reform Act of 1995
E. Riegle Community Development and Regulatory Improvement Act
of 1994
I. Background
A. Overview of Changes to U.S. Generally Accepted Accounting Principles
In June 2016, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update (ASU) No. 2016-13, Topic 326,
Financial Instruments--Credit Losses,\1\ which revises the accounting
for credit losses under U.S. generally accepted accounting principles
(U.S. GAAP). ASU No. 2016-13 introduces the current expected credit
losses methodology (CECL), which replaces the incurred loss methodology
for financial assets measured at amortized cost, and the term,
purchased credit-deteriorated (PCD) assets, which replaces the term,
purchased credit-impaired (PCI) assets, and modifies the treatment of
credit losses on available-for-sale (AFS) debt securities.
---------------------------------------------------------------------------
\1\ ASU No. 2016-13 introduces ASC Topic 326 which covers
measurement of credit losses on financial instruments and includes
three subtopics: (i) Subtopic 10 Financial Instruments--Credit
Losses--Overall; (ii) Subtopic 20: Financial Instruments--Credit
Losses--Measured at Amortized Cost; and (iii) Subtopic 30: Financial
Instruments--Credit Losses--Available-for-Sale Debt Securities.
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The new accounting standard for credit losses will apply to all
banking organizations \2\ that are subject to the regulatory capital
rules \3\ (capital rules) of the Office of the Comptroller of the
Currency (OCC), the Board of Governors of the Federal Reserve System
(Board), and the Federal Deposit Insurance Corporation (FDIC)
(collectively, the agencies), and that file regulatory reports for
which the reporting requirements are required to conform to U.S.
GAAP.\4\
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\2\ Banking organizations subject to the capital rules include
national banks, state member banks, state nonmember banks, savings
associations, and top-tier bank holding companies and savings and
loan holding companies domiciled in the United States not subject to
the Board's Small Bank Holding Company Policy Statement (12 CFR part
225, appendix C), but exclude certain savings and loan holding
companies that are substantially engaged in insurance underwriting
or commercial activities or that are estate trusts, and bank holding
companies and savings and loan holding companies that are employee
stock ownership plans.
\3\ 12 CFR part 3 (OCC); 12 CFR part 217 (Board); 12 CFR part
324 (FDIC).
\4\ See 12 U.S.C. 1831n; see also Instructions for Preparation
of Consolidated Financial Statements for Holding Companies,
Reporting Form FR Y-9C (Reissued March 2013); Instructions for
Preparation of Consolidated Reports of Condition and Income,
Reporting Forms FFIEC 031 and FFIEC 041 (last update September
2017); Instructions for Preparation of Consolidated Reports of
Condition and Income for a Bank with Domestic Offices Only and Total
Assets Less than $1 Billion, Reporting Form FFIEC 051 (last update
September 2017).
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CECL differs from the incurred loss methodology in several key
respects. First, CECL requires banking organizations to recognize
lifetime expected credit losses for financial assets measured at
amortized cost, not just those credit losses that have been incurred as
of the reporting date. CECL also requires the incorporation of
reasonable and supportable forecasts in developing an estimate of
lifetime expected credit losses, while maintaining the current
requirement for banking organizations to consider past events and
current conditions. Furthermore, the probable threshold for recognition
of allowances in accordance with the incurred loss methodology is
removed under CECL. Taken together, estimating expected credit losses
over the life of an asset under CECL, including consideration of
reasonable and supportable forecasts but without applying the probable
threshold that exists under the incurred loss
[[Page 22314]]
methodology, results in earlier recognition of credit losses.
In addition, CECL replaces multiple impairment approaches in
existing U.S. GAAP. CECL allowances will cover a broader range of
financial assets than allowance for loan and lease losses (ALLL) under
the incurred loss methodology. Under the incurred loss methodology, in
general, ALLL covers credit losses on loans held for investment and
lease financing receivables, with additional allowances for certain
other extensions of credit and allowances for credit losses on certain
off-balance sheet credit exposures (with the latter allowances
presented as a liability).\5\ These exposures will be within the scope
of CECL. In addition, CECL covers credit losses on held-to-maturity
(HTM) debt securities. As mentioned above, ASU No. 2016-13 also
introduces PCD assets as a replacement for PCI assets. The PCD asset
definition covers a broader range of assets than the PCI asset
definition. CECL requires banking organizations to estimate and record
credit loss allowances for a PCD asset at the time of purchase. The
credit loss allowance is then added to the purchase price to determine
the amortized cost basis of the asset for financial reporting purposes.
Post-acquisition increases in credit loss allowances on PCD assets will
be established through a charge to earnings. This is different from the
current treatment of PCI assets, for which banking organizations are
not permitted to estimate and recognize credit loss allowances at the
time of purchase. Rather, in general, credit loss allowances for PCI
assets are estimated subsequent to the purchase only if there is
deterioration in the expected cash flows from the assets.
---------------------------------------------------------------------------
\5\ ``Other extensions of credit'' includes trade and
reinsurance receivables, and receivables that relate to repurchase
agreements and securities lending agreements. ``Off-balance sheet
credit exposures'' includes off-balance sheet credit exposures not
accounted for as insurance, such as loan commitments, standby
letters of credit, and financial guarantees. The agencies note that
credit losses for off-balance sheet credit exposures that are
unconditionally cancellable by the issuer are not recognized under
CECL.
---------------------------------------------------------------------------
ASU No. 2016-13 also introduces new requirements for AFS debt
securities. The new accounting standard requires that a banking
organization recognize credit losses on individual AFS debt securities
through credit loss allowances, rather than through direct write-downs,
as is currently required under U.S. GAAP. AFS debt securities will
continue to be measured at fair value, with changes in fair value not
related to credit losses recognized in other comprehensive income.
Credit loss allowances on an AFS debt security are limited to the
amount by which the security's fair value is less than its amortized
cost.
Upon adoption of CECL, a banking organization will record a one-
time adjustment to its credit loss allowances as of the beginning of
its fiscal year of adoption equal to the difference, if any, between
the amount of credit loss allowances required under the incurred loss
methodology and the amount of credit loss allowances required under
CECL. Except for PCD assets, the adjustment to credit loss allowances
would be recognized with offsetting entries to deferred tax assets
(DTAs), if appropriate, and to the fiscal year's beginning retained
earnings.
The effective date of ASU No. 2016-13 varies for different banking
organizations. For banking organizations that are U.S. Securities and
Exchange Commission (SEC) filers,\6\ ASU No. 2016-13 will become
effective for the first fiscal year beginning after December 15, 2019,
including interim periods within that fiscal year. For banking
organizations that are public business entities (PBE) \7\ but not SEC
filers (as defined in U.S. GAAP), ASU No. 2016-13 will become effective
for the first fiscal year beginning after December 15, 2020, including
interim periods within that fiscal year. For banking organizations that
are not PBEs (as defined in U.S. GAAP), ASU No. 2016-13 will become
effective for the first fiscal year beginning after December 15, 2020;
however, these banking organizations will not be required to adopt ASU
No. 2016-13 for interim period reporting until the first fiscal year
that begins after December 15, 2021. A banking organization that
chooses to apply ASU No. 2016-13 early may do so in the first fiscal
year beginning after December 15, 2018, including interim periods. The
following table provides a summary of the effective dates.
---------------------------------------------------------------------------
\6\ An SEC filer is an entity (e.g., a bank holding company or
savings and loan holding company) that is required to file its
financial statements with the SEC under the federal securities laws
or, for an insured depository institution, the appropriate federal
banking agency under section 12(i) of the Securities Exchange Act of
1934. The banking agencies named under section 12(i) of the
Securities Exchange Act of 1934 are the OCC, the Board, and the
FDIC.
\7\ A public business entity (PBE) that is not an SEC filer
would include: (1) An entity that has issued securities that are
traded, listed, or quoted on an over-the-counter market, or (2) an
entity that has issued one or more securities that are not subject
to contractual restrictions on transfer and is required by law,
contract, or regulation to prepare U.S. GAAP financial statements
(including footnotes) and make them publicly available periodically
(e.g., pursuant to Section 36 of the Federal Deposit Insurance Act
and part 363 of the FDIC's rules). For further information on the
definition of a PBE, refer to ASU No. 2013-12, Definition of a
Public Business Entity, issued in December 2013.
CECL Effective Dates
------------------------------------------------------------------------
Regulatory
U.S. GAAP effective report
date effective date *
------------------------------------------------------------------------
PBEs that are SEC Filers...... Fiscal years beginning 3/31/2020.
after 12/15/2019,
including interim
periods within those
fiscal years.
Other PBEs (Non-SEC Filers)... Fiscal years beginning 3/31/2021.
after 12/15/2020,
including interim
periods within those
fiscal years.
Non-PBEs...................... Fiscal years beginning 12/31/2021.
after 12/15/2020, and
interim periods for
fiscal years
beginning after 12/15/
2021.
Early Application............. Early application 3/31 of year of
permitted for fiscal effective date
years beginning after of early
12/15/2018, including application of
interim periods ASU 2016-13.
within those fiscal
years.
------------------------------------------------------------------------
* For institutions with calendar year-ends.
B. Regulatory Capital
Changes necessitated by CECL to a banking organization's retained
earnings, DTAs, and allowances will affect its regulatory capital
ratios.\8\ Specifically, retained earnings are a key component of a
banking organization's common equity tier 1 (CET1) capital. An increase
in a banking organization's
[[Page 22315]]
allowances, including those estimated under CECL, generally will reduce
the banking organization's earnings or retained earnings, and therefore
its CET1 capital.\9\ DTAs arising from temporary differences (temporary
difference DTAs) must be included in a banking organization's risk-
weighted assets or deducted from CET1 capital if they exceed certain
thresholds. Increases in allowances generally give rise to increases in
temporary difference DTAs that will partially offset the reduction in
earnings or retained earnings.\10\ Under the standardized approach of
the capital rules, ALLL is included in a banking organization's tier 2
capital up to 1.25 percent of its standardized total risk-weighted
assets (excluding its standardized market risk-weighted assets, if
applicable).\11\ An advanced approaches banking organization \12\ that
has completed the parallel run process \13\ includes in its advanced-
approaches-adjusted total capital any eligible credit reserves that
exceed the banking organization's total expected credit losses, as
defined in the capital rules, to the extent that the excess reserve
amount does not exceed 0.6 percent of the banking organization's credit
risk-weighted assets.\14\
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\8\ 12 CFR 3.20 (OCC); 12 CFR 217.20 (Board); 12 CFR 324.20
(FDIC).
\9\ However, allowances recognized on PCD assets upon adoption
of CECL and upon later purchases of PCD assets generally would not
reduce the banking organization's earnings, retained earnings, or
CET1 capital.
\10\ Deferred tax assets are a result of deductible temporary
differences and carryforwards which result in a decrease in taxes
payable in future years.
\11\ Any amount of ALLL greater than the 1.25 percent limit is
deducted from standardized total risk-weighted assets.
\12\ A banking organization is an advanced approaches banking
organization if it has consolidated assets of at least $250 billion
or if it has consolidated on-balance sheet foreign exposures of at
least $10 billion, or if it is a subsidiary of a depository
institution, bank holding company, savings and loan holding company,
or intermediate holding company that is an advanced approaches
banking organization. See 12 CFR 3.100 (OCC); 12 CFR 217.100
(Board); 12 CFR 324.100 (FDIC).
\13\ An advanced approaches banking organization is considered
to have completed the parallel run process once it has completed the
advanced approaches qualification process and received notification
from its primary federal regulator pursuant to section 121(d) of
subpart E of the capital rules. See 12 CFR 3.121(d) (OCC); 12 CFR
217.121(d) (Board); 12 CFR 324.121(d) (FDIC).
\14\ 12 CFR 3.10(c)(3)(ii) (OCC); 12 CFR 217.10(c)(3)(ii)
(Board); and 12 CFR 324.10(c)(3)(ii) (FDIC).
---------------------------------------------------------------------------
II. Description of the Proposed Rule
To address the forthcoming implementation of changes to U.S. GAAP
resulting from the FASB's issuance of ASU No. 2016-13 and to improve
consistency between the capital rules and U.S. GAAP, the agencies
propose to amend their capital rules to identify which credit loss
allowances under the new accounting standard are eligible for inclusion
in a banking organization's regulatory capital.\15\ In particular, the
agencies are proposing to add allowance for credit losses (ACL) as a
newly defined term in the capital rules. ACL would include credit loss
allowances related to financial assets measured at amortized cost,
except for allowances for PCD assets. ACL would be eligible for
inclusion in a banking organization's tier 2 capital subject to the
current limit for including ALLL in tier 2 capital under the capital
rules.
---------------------------------------------------------------------------
\15\ Note that under section 37 of the Federal Deposit Insurance
Act, the accounting principles applicable to reports or statements
required to be filed with the agencies by all insured depository
institutions must be uniform and consistent with GAAP. See 12 U.S.C.
1831n(a)(2)(A). Consistency in reporting under the statute would be
addressed by the agencies' CECL revisions to the Call Report
pursuant to the Paperwork Reduction Act.
---------------------------------------------------------------------------
Further, the agencies are proposing to revise the capital rules, as
applicable to an advanced approaches banking organization that has
adopted CECL, and that has completed the parallel run process, to align
the definition of eligible credit reserves with the definition of ACL
in this proposal. For such a banking organization, the proposal would
retain the current limit for including eligible credit reserves in tier
2 capital.
The proposal also would provide a separate capital treatment for
allowances associated with AFS debt securities and PCD assets that
would apply to all banking organizations upon adoption of ASU 2016-13.
In addition, the agencies are proposing to provide banking
organizations the option to phase in the day-one adverse regulatory
capital effects of CECL adoption over a three-year period (CECL
transition provision). The CECL transition provision is intended to
address banking organizations' challenges in capital planning for CECL
implementation, including the uncertainty of economic conditions at the
time a banking organization adopts CECL.
The proposed rule also would revise regulatory disclosure
requirements that would apply to certain banking organizations
following their adoption of CECL.\16\ Revisions to the agencies'
regulatory reports will be proposed in a separate notice. Finally, the
proposed rule would make conforming amendments to the agencies' other
regulations that refer to credit loss allowances to reflect the
implementation of ASU No. 2016-13.
---------------------------------------------------------------------------
\16\ For certain banking organizations, sections 63 and 173 of
the capital rules require disclosure of items such as capital
structure, capital adequacy, credit risk, and credit risk
mitigation.
---------------------------------------------------------------------------
A. Proposed Revisions to the Capital Rules To Reflect the Change in
U.S. GAAP
1. Introduction of Allowances for Credit Losses as a Newly Defined Term
The agencies are proposing to revise the capital rules to reflect
the revised accounting standard for credit losses under U.S. GAAP as it
relates to banking organizations' calculation of regulatory capital
ratios. Under the proposal, the new term ACL, rather than ALLL, would
apply to a banking organization that has adopted CECL. Consistent with
the treatment of ALLL under the capital rules' standardized approach,
amounts of ACL would be eligible for inclusion in a banking
organization's tier 2 capital up to 1.25 percent of the banking
organization's standardized total risk-weighted assets (excluding its
standardized market risk-weighted assets, if applicable).
CECL allowances cover a broader range of financial assets than ALLL
under the incurred loss methodology. Under the capital rules, ALLL
includes valuation allowances that have been established through a
charge against earnings to cover estimated credit losses on loans or
other extensions of credit as determined in accordance with U.S. GAAP.
Under CECL, credit loss allowances represent an accounting valuation
account, measured as the difference between the financial assets'
amortized cost basis and the amount expected to be collected on the
financial assets (i.e., lifetime credit losses). Thus, ACL would
include allowances for expected credit losses on HTM debt securities
and lessors' net investments in leases that have been established to
reduce these assets to amounts expected to be collected, as determined
in accordance with U.S. GAAP. ACL also would include allowances for
expected credit losses on off-balance sheet credit exposures not
accounted for as insurance, as determined in accordance with U.S. GAAP.
As described below, however, credit loss allowances related to AFS debt
securities and PCD assets would not be included in the definition of
ACL. As with the treatment of ALLL, ACL under the proposal also would
exclude allocated transfer risk reserves.
Question 1: The agencies request comment on whether use of the term
``allowance for credit losses'' within the capital rules would present
operational or other challenges, or generally cause confusion for
banking organizations, given other contextual uses for the term,
[[Page 22316]]
particularly in U.S. GAAP and accounting guidance.
2. Definition of Carrying Value
The agencies are proposing to revise the regulatory definition of
carrying value under the capital rules to provide that, for all assets
other than AFS debt securities and PCD assets, the carrying value is
not reduced by any associated credit loss allowance.
i. Available-for-Sale Debt Securities
Current accounting standards require a banking organization to make
an individual assessment of each of its AFS debt securities and take a
direct write-down for credit losses when such a security is other-than-
temporarily impaired. The amount of the write-down is against earnings,
which reduces CET1 capital and also results in a reduction in the same
amount of the carrying value of the AFS debt security. ASU No. 2016-13
revises the accounting for credit impairment of AFS debt securities by
requiring banking organizations to determine whether a decline in fair
value below an AFS debt security's amortized cost resulted from a
credit loss, and to record any such credit impairment through earnings
with a corresponding allowance. Similar to the current regulatory
treatment of credit-related losses for other-than-temporary impairment,
under the proposal all credit losses recognized on AFS debt securities
would flow through to CET1 capital and reduce the carrying value of the
AFS debt security. Since the carrying value of an AFS debt security is
its fair value, which would reflect any credit impairment, credit loss
allowances for AFS debt securities required under the new accounting
standard would not be eligible for inclusion in a banking
organization's tier 2 capital.
ii. Purchased Credit-Deteriorated Assets
Under the new accounting standard, PCD assets are acquired
individual financial assets (or acquired groups of financial assets
with shared risk characteristics) that, as of the date of acquisition
and as determined by an acquirer's assessment, have experienced a more-
than-insignificant deterioration in credit quality since origination.
The new accounting standard will require a banking organization to
estimate expected credit losses that are embedded in the purchase price
of a PCD asset and recognize these amounts as an allowance as of the
date of acquisition. As such, the initial allowance amount for a PCD
asset recorded on a banking organization's balance sheet will not be
established through a charge to earnings. Post-acquisition increases in
allowances for PCD assets will be established through a charge against
earnings.
Including in tier 2 capital allowances that have not been charged
against earnings would diminish the quality of regulatory capital.
Accordingly, the agencies are proposing to maintain the requirement
that valuation allowances be charged against earnings in order to be
eligible for inclusion in tier 2 capital. The agencies also are
clarifying that valuation allowances that are charged to retained
earnings in accordance with U.S. GAAP (i.e., the allowances required at
CECL adoption) are eligible for inclusion in tier 2 capital. The
agencies considered proposing to allow banking organizations to
bifurcate PCD allowances to include only post-acquisition allowances in
the definition of ACL. The agencies are concerned, however, that a
bifurcated approach could create undue complexity and burden for
banking organizations when determining the amount of credit loss
allowances for PCD assets eligible for inclusion in tier 2 capital.
Therefore, the proposal excludes PCD allowances from being included in
tier 2 capital. The proposal also revises the definition of carrying
value such that for PCD assets the carrying value is calculated net of
allowances. This treatment of PCD assets would, in effect, reduce a
banking organization's standardized total risk-weighted assets, similar
to the proposed treatment for credit loss allowances for AFS debt
securities.
Question 2: The agencies are requesting comment on whether the
definition of ACL is appropriate for determining the amount of
allowances that may be included in a banking organization's tier 2
capital and whether the approach to AFS debt securities and PCD assets
is appropriate. What, if any, alternatives with respect to the
treatment of ACL, AFS debt securities, and PCD assets should the
agencies consider and what are the associated advantages and
disadvantages of such alternatives?
3. Additional Considerations
The agencies are not proposing to change the limit of 1.25 percent
of risk-weighted assets governing the amount of ACL eligible for
inclusion in tier 2 capital. The agencies intend to monitor the effects
of this limit on regulatory capital and bank lending practices. This
ongoing monitoring will include the review of data, including data
provided by banking organizations, and will assist the agencies in
determining whether a further change to the capital rules' treatment of
ACL might be warranted. To the extent the agencies determine that
further revisions to the capital rules are necessary, the agencies
would seek comment through a separate proposal.
B. CECL Transition Provision
As discussed above, upon adopting CECL, a banking organization will
record an adjustment to its credit loss allowances equal to the
difference between the amount of credit loss allowances required under
the incurred loss methodology and the amount of credit loss allowances
required under CECL. Some banking organizations have expressed concerns
about the difficulty in capital planning due to the uncertainty about
the economic environment at the time of CECL adoption. This is largely
because CECL requires banking organizations to consider current and
future expected economic conditions to estimate allowances and these
conditions will not be known until closer to a banking organization's
CECL adoption date. Therefore, it is possible that despite adequate
planning to prepare for the implementation of CECL, unexpected economic
conditions at the time of CECL adoption could result in higher-than-
anticipated increases in allowances. To address these concerns, the
agencies are proposing to provide a banking organization with the
option to phase in over a three-year period the day-one adverse effects
of CECL on the banking organization's regulatory capital ratios.
1. Election of the Optional CECL Transition Provision
Under the proposal, a banking organization that experiences a
reduction in retained earnings as of the CECL adoption date may elect
to phase in the regulatory capital impact of adopting CECL over a
three-year transition period (electing banking organization). An
electing banking organization would be required to begin applying the
CECL transition provision as of the electing banking organization's
CECL adoption date. An electing banking organization would indicate in
its regulatory report its election to use the CECL transition provision
beginning in the quarter that it first reports its credit loss
allowances as measured under CECL.\17\
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\17\ An insured depository institution would indicate its
election to use the CECL transition provision on its Consolidated
Reports of Condition and Income. A holding company would indicate
its election to use the CECL transition provision on its FR Y-9C.
---------------------------------------------------------------------------
A banking organization that does not elect to use the CECL
transition provision in the quarter that it first
[[Page 22317]]
reports its credit loss allowances as measured under CECL would not be
permitted to make an election in subsequent reporting periods and would
be required to reflect the full effect of CECL in its regulatory
capital ratios as of the banking organization's CECL adoption date. For
example, a banking organization that adopts CECL as of January 1, 2020,
and does not elect to use the CECL transition provision in its
regulatory report as of March 31, 2020, would not be permitted to use
the CECL transition provision in any subsequent reporting period.
A banking organization that is a non-PBE must adopt CECL no later
than for fiscal years beginning after December 15, 2020, and for
interim periods for fiscal years beginning after December 15, 2021. As
a result, unless it chooses to adopt CECL as of an earlier date, such a
banking organization with a calendar fiscal year will initially reflect
CECL in its regulatory report filed as of December 31, 2021, even
though CECL was effective for that banking organization as of the first
day of the fiscal year. Such a banking organization's regulatory
capital would not be affected by CECL during the first three reporting
periods of 2021 and therefore the banking organization would initially
be eligible to elect the CECL transition provision in its December 31,
2021 regulatory report. The second year of the transition period would
begin in the banking organization's March 31, 2022 regulatory report.
Under the proposed rule, a depository institution holding company
subject to the Board's capital rule and each of its subsidiary insured
depository institutions would be eligible to make a CECL transition
provision election independent of one another.
2. Mechanics of the CECL Transition Provision
The CECL transition provision is designed to phase in the day-one
adverse impact on a banking organization's regulatory capital ratios
resulting from its adoption of CECL. To calculate its transitional
amounts under the CECL transition provision, an electing banking
organization would compare the difference between its closing balance
sheet amount for the fiscal year-end immediately prior to its adoption
of CECL (pre-CECL amount) and its balance sheet amount as of the
beginning of the fiscal year in which the electing banking organization
adopts CECL (post-CECL amount) for the following items: Retained
earnings, temporary difference DTAs, and credit loss allowances
eligible for inclusion in regulatory capital. The differences
determined for each of these items would constitute the transitional
amounts that an electing banking organization would phase in to its
regulatory capital calculations over the proposed transition period,
which would be the three-year period (twelve quarters) beginning the
first day of the fiscal year in which the electing banking organization
adopts CECL.
Specifically, under the proposed rule, an electing banking
organization's CECL transitional amount would be determined as the
difference between its pre-CECL and post-CECL amounts of retained
earnings (CECL transitional amount). An electing banking organization's
DTA transitional amount would be determined as the difference between
its pre-CECL and post-CECL amounts of temporary difference DTAs (DTA
transitional amount). An electing banking organization's ACL
transitional amount would be determined as the difference between its
pre-CECL amount of ALLL and its post-CECL amount of ACL (ACL
transitional amount).
Under the standardized approach, an electing banking organization
would phase in over the transition period its CECL transitional amount,
DTA transitional amount, and ACL transitional amount. The electing
banking organization also would phase in over the transition period the
CECL transitional amount to its average total consolidated assets for
purposes of calculating the tier 1 leverage ratio. Each transitional
amount would be phased in over the transition period on a straight line
basis.
Thus, for regulatory capital ratio calculation purposes, an
electing banking organization would phase in the CECL transitional
amount by increasing its retained earnings by 75 percent of its CECL
transitional amount during the first year of the transition period, by
50 percent of its CECL transitional amount during the second year of
the transition period, and by 25 percent of its CECL transitional
amount during the third year of the transition period. The electing
banking organization would phase in the DTA transitional amount by
decreasing the amount of its temporary difference DTAs by 75 percent of
its DTA transitional amount during the first year of the transition
period, by 50 percent of its DTA transitional amount during the second
year of the transition period, and by 25 percent of its DTA
transitional amount during the third year of the transition period. The
banking organization would phase in the ACL transitional amount by
decreasing the amount of its ACL by 75 percent of its ACL transitional
amount during the first year of the transition period, by 50 percent of
its ACL transitional amount during the second year of the transition
period, and by 25 percent of its ACL transitional amount during the
third year of the transition period. Finally, for regulatory capital
ratio calculation purposes, the electing banking organization would
increase the amount of its average total consolidated assets by its
CECL transitional amount over the transition period on the same
straight line basis (i.e., increasing average total consolidated assets
by 75 percent of the CECL transitional amount during year 1, by 50
percent during year 2, and by 25 percent during year 3 of the
transition period).
For example, consider a hypothetical electing banking organization
that has a CECL effective date of January 1, 2020, and a 21 percent tax
rate. On the closing balance sheet date immediately prior to adopting
CECL (i.e., December 31, 2019), the electing banking organization has
$10 million in retained earnings and $1 million of ALLL. On the opening
balance sheet date immediately after adopting CECL (i.e., January 1,
2020), the electing banking organization has $1.2 million of ACL. The
electing banking organization would recognize the adoption of CECL by
recording an increase to ACL (credit) of $200,000, with an offsetting
increase in temporary difference DTAs of $42,000 (debit), and a
reduction in beginning retained earnings of $158,000 (debit). For each
of the quarterly reporting periods in year 1 of the transition period
(i.e., 2020), the electing banking organization would increase both
retained earnings and average total consolidated assets by $118,500
($158,000 x 75 percent), decrease temporary difference DTAs by $31,500
($42,000 x 75 percent), and decrease ACL by $150,000 ($200,000 x 75
percent) for purposes of calculating its regulatory capital ratios. The
remainder of the CECL transition provision would be transitioned into
regulatory capital according to the schedule provided in Table 1.
[[Page 22318]]
Table 1--Example of a CECL Transition Provision Schedule
----------------------------------------------------------------------------------------------------------------
Transitional Transitional amounts applicable during each
amounts year of the transition period
---------------------------------------------------------------
In thousands Column A Column B Column C Column D
---------------------------------------------------------------
Year 1 at 75% Year 2 at 50% Year 3 at 25%
----------------------------------------------------------------------------------------------------------------
Increase retained earnings and average total $158 $118.50 $79 $39.50
consolidated assets by the CECL transitional
amount.........................................
Decrease temporary difference DTAs by the DTA 42 31.50 21 10.50
transitional amount............................
Decrease ACL by the ACL transitional amount..... 200 150 100 50
----------------------------------------------------------------------------------------------------------------
The result of the CECL transition provision for an electing banking
organization would be to phase in the effect of the adoption of CECL in
its regulatory capital ratios in a uniform manner. The phase in of the
CECL transitional amount to retained earnings would mitigate the
decrease in an electing banking organization's CET1 capital resulting
from CECL adoption, and would increase during the transition period the
level at which the capital rule's CET1 capital deduction thresholds
would be triggered. The DTA transitional amount would phase in the
amount of an electing banking organization's temporary difference DTAs
subject to the CET1 capital deduction thresholds and the amount of
temporary difference DTAs included in risk-weighted assets. The ACL
transitional amount would phase in the amount of ACL that an electing
banking organization may include in its tier 2 capital up to the limit
of 1.25 percent of its standardized total risk-weighted assets
(excluding its standardized market risk-weighted assets, if
applicable). Finally, for purposes of an electing banking
organization's tier 1 leverage ratio calculation, the addition of the
CECL transitional amount to average total consolidated assets would
offset the immediate decrease that would otherwise occur as a result of
the adjustments to ACL and temporary difference DTAs resulting from the
adoption of CECL.
Notwithstanding the CECL transition provision, all other aspects of
the capital rules would continue to apply. Thus, all regulatory capital
adjustments and deductions would continue to apply and an electing
banking organization would continue to be limited in the amount of ACL
that it could include in its tier 2 capital.\18\
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\18\ 12 CFR 3.10(c)(3)(ii)(B), 12 CFR 3.20(d)(3) (OCC); 12 CFR
217.10(c)(3)(ii)(B), 12 CFR 217.20(d)(3) (Board); 12 CFR
324.10(c)(3)(ii)(B), 12 CFR 324.20(d)(3) (FDIC).
---------------------------------------------------------------------------
Question 3: The agencies seek comment on other potential approaches
to phasing in the day-one effects of CECL on banking organizations'
regulatory capital ratios. What are the pros and cons of such
alternative approaches?
3. CECL Transition Provision Time Period
As noted, the agencies are proposing a phase-in period of three
years. ASU No. 2016-13 was issued in 2016 and becomes mandatory in 2020
at the earliest, which provides banking organizations with at least
four years to plan for CECL implementation. While the agencies
recognize that a banking organization will better understand the
macroeconomic factors that may affect the size of the banking
organization's one-time adjustment to CECL closer to its CECL adoption
date, the agencies view a period of four years to plan for CECL,
combined with the proposed three-year transition period, as a
sufficient amount of time for a banking organization to adjust and
adapt to any immediate adverse effects on regulatory capital ratios
resulting from CECL adoption.
Question 4: The agencies seek comment on the sufficiency of the
proposed three-year transition period. Would a different time period be
more appropriate? If so, why?
4. Business Combinations
Under the proposal, an electing banking organization that acquires
another banking organization (as determined under U.S. GAAP) during the
period in which the electing banking organization is using its CECL
transition provision would continue to make use of its transitional
amounts based on its calculation as of the date of its adoption of
CECL. Business combinations would cover mergers, acquisitions, and
transactions in which two existing unrelated entities combine into a
newly created third entity. However, any CECL transitional amounts, DTA
transitional amounts, and ACL transitional amounts of an acquired
electing banking organization would not flow through to the resulting
banking organization as the assets of an acquired banking organization
are generally measured at fair value at the time of the business
combination.
Question 5: The agencies seek comment on the proposed treatment of
business combinations and other potential approaches to treating
business combinations within the context of the CECL transition
provision. What are the pros and cons of such alternative approaches?
5. Supervisory Oversight
For purposes of determining whether an electing banking
organization is in compliance with its regulatory capital requirements
(including capital buffer and prompt corrective action (PCA)
requirements), the agencies would use the electing banking
organization's regulatory capital ratios as adjusted by the CECL
transition provision. Through the supervisory process, the agencies
would continue to examine banking organizations' credit loss estimates
and allowance balances regardless of whether the banking organization
has elected to use the CECL transition provision. In addition, the
agencies may monitor electing banking organizations to ensure that such
banking organizations have adequate capital at the expiration of their
CECL transition provision period.
C. Additional Requirements for Advanced Approaches Banking
Organizations
Under the capital rules, an advanced approaches banking
organization that has completed the parallel run process includes in
its advanced-approaches-adjusted total capital any amount of eligible
credit reserves that exceeds its regulatory expected credit losses to
the extent that the excess reserve amount does not exceed 0.6 percent
of the banking organization's credit risk-weighted assets.\19\ The
agencies propose to revise the definition of eligible credit reserves
to align with the definition of
[[Page 22319]]
ACL in this proposal. Under the proposal, for an advanced approaches
banking organization that has adopted CECL, eligible credit reserves
would mean all general allowances that have been established through a
charge against earnings or retained earnings to cover expected credit
losses associated with on- or off-balance sheet wholesale and retail
exposures, including ACL associated with such exposures. Similar to the
current definition of eligible credit reserves, the definition of
eligible credit reserves applicable to banking organizations that have
adopted CECL would exclude allocated transfer risk reserves established
pursuant to 12 U.S.C. 3904. In addition, the revised eligible credit
reserves definition would exclude allowances that reflect credit losses
on PCD assets and AFS debt securities, and other specific reserves
created against recognized losses. The definition of eligible credit
reserves would remain unchanged for an advanced approaches banking
organization that has not adopted CECL.
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\19\ 12 CFR 3.10(c)(3)(ii) (OCC); 12 CFR 217.10(c)(3)(ii)
(Board); and 12 CFR 324.10(c)(3)(ii) (FDIC).
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For purposes of the supplementary leverage ratio, which is
applicable to all advanced approaches banking organizations, the
proposal would maintain the current definition of total leverage
exposure. Thus, total leverage exposure would continue to include,
among other items, the balance sheet carrying value of an advanced
approaches banking organization's on-balance sheet assets less amounts
deducted from tier 1 capital.
An advanced approaches banking organization that elects to use the
CECL transition provision (electing advanced approaches banking
organization) would increase its total leverage exposure for purposes
of the supplementary leverage ratio by 75 percent of its CECL
transitional amount during the first year of the transition period,
increase its total leverage exposure for purposes of the supplementary
leverage ratio by 50 percent of its CECL transitional amount during the
second year of the transition period, and increase its total leverage
exposure for purposes of the supplementary leverage ratio by 25 percent
of its CECL transitional amount during the third year of the transition
period.
In addition, an electing advanced approaches banking organization
that has completed the parallel run process would calculate an
additional transitional amount to be phased into its eligible credit
reserves (eligible credit reserves transitional amount). The eligible
credit reserves transitional amount would mean the increase in the
amount of an advanced approaches banking organization's eligible credit
reserves as of the beginning of the fiscal year in which the banking
organization adopts CECL from the amount of that banking organization's
eligible credit reserves as of the closing of the fiscal year-end
immediately prior to the banking organization's adoption of CECL. An
electing advanced approaches banking organization would decrease the
amount of its eligible credit reserves by its eligible credit reserves
transitional amount over the transition period on a straight line basis
(i.e., decreasing eligible credit reserves by 75 percent during year 1,
by 50 percent during year 2, and by 25 percent during year 3).
An advanced approaches banking organization that has completed the
parallel run process is required to deduct from CET1 capital the amount
of expected credit loss that exceeds its eligible credit reserves (ECR
shortfall). Due to this requirement, an advanced approaches banking
organization's CET1 capital immediately after CECL adoption may be
greater than its CET1 capital immediately before CECL adoption.\20\
This is because, for such banking organizations, CECL allowances can
have a dual impact on CET1 capital: A reduction in retained earnings
(partially offset by DTAs) and a concurrent reduction in the CET1 ECR
shortfall deduction. The agencies are concerned that the use of the
CECL transition provision could provide an undue benefit to a banking
organization that had an ECR shortfall prior to its adoption of CECL
and could undermine an objective of the CECL transition provision to
provide relief to banking organizations that experience an immediate
adverse impact to regulatory capital as a result of CECL adoption.
Therefore, the agencies are proposing to limit the CECL transitional
amount that such an electing advanced approaches banking organization
can include in retained earnings. As part of this proposal, an electing
advanced approaches banking organization that (1) has completed the
parallel run process, (2) has an ECR shortfall immediately prior to the
adoption of CECL, and (3) would have an increase in CET1 capital as of
the beginning of the fiscal year in which it adopts CECL after
including the first year portion of the CECL transitional amount, must
decrease its CECL transitional amount by its DTA transitional
amount.\21\ The agencies believe requiring such an advanced approaches
banking organization to reduce its CECL transitional amount by its DTA
transitional amount would be simple to implement and thus would not be
operationally burdensome. As an alternative approach, the agencies also
would consider requiring an electing advanced approaches banking
organization with an ECR shortfall immediately prior to the adoption of
CECL to reduce its CECL transitional amount by the amount necessary to
cause its CET1 capital upon adoption of CECL to not exceed CET1 capital
immediately prior to adoption of CECL.
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\20\ See 12 CFR 3.121(d) (OCC); 12 CFR 217.121(d) (Board); and
12 CFR 324.121(d) (FDIC).
\21\ For example, if a banking organization has completed the
parallel run process, has an ECR shortfall immediately prior to the
adoption of CECL, would have an increase in CET1 capital as of the
beginning of the fiscal year in which it adopts CECL after including
the first year portion of the CECL transitional amount, and, upon
the adoption of CECL, records an increase to ACL (credit) of
$200,000, with an offsetting increase in temporary difference DTAs
of $42,000 (debit), and a reduction in beginning retained earnings
of $158,000 (debit), then that banking organization would have a
CECL transitional amount of $116,000 ($158,000-$42,000), and would
apply $87,000 in year 1, $58,000 in year 2, and $29,000 in year 3 of
the transition period.
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Question 6: The agencies are requesting comment on whether the
definition of eligible credit reserves is appropriate for determining
the amount of allowances that may be included in an advanced approaches
banking organization's total capital. What, if any, alternatives with
respect to the treatment of eligible credit reserves should the
agencies consider and what are the associated advantages and
disadvantages of such alternatives?
Question 7: The agencies are requesting comment on the proposed
CECL transitional amount limitation for certain advanced approaches
banking organizations that have an ECR shortfall. What, if any, are the
associated advantages and disadvantages of the alternatives provided by
the agencies?
D. Disclosures and Regulatory Reporting
Under the proposed rule, banking organizations subject to the
disclosure requirements in section 63 of the capital rules would be
required to update their disclosures to reflect the adoption of CECL.
For example, such banking organizations would be required to disclose
ACL instead of ALLL after CECL adoption.
For advanced approaches banking organizations, the agencies propose
similar revisions to Tables 2, 3, and 5 in section 173 of the capital
rules to reflect the adoption of CECL. In addition, the agencies are
proposing revisions to those tables for electing advanced approaches
banking organizations to disclose two sets of regulatory capital
ratios. One set would
[[Page 22320]]
reflect the banking organization's capital ratios with the CECL
transition provision and the other set would reflect the banking
organization's capital ratios on a fully phased-in basis.
In addition, to reflect changes in U.S. GAAP, the agencies
anticipate proposing revisions to the regulatory reporting forms in a
separate proposal. These proposed revisions would specify how electing
banking organizations would report their transitional amounts for the
affected line items in Schedule RC-R of the Call Report and Schedule
HC-R of the FR Y-9C. In addition, the agencies intend to update
instructions for certain other reporting forms, including the FFIEC
101, to account for the CECL transition provision.
E. Conforming Changes to Other Agency Regulations
1. OCC Regulations
In addition to the capital rules, seven provisions in other OCC
regulations refer to ALLL, as defined in 12 CFR part 3, in calculating
various statutory or regulatory limits. Specifically, ALLL is used in
calculating limits on holdings of certain investment securities (12 CFR
part 1); limits on ownership of bankers' bank stock (12 CFR 5.20);
limits on investments in bank premises (12 CFR 5.37); limits on leasing
of personal property (12 CFR 23.4); limits on certain community
development investments (12 CFR 24.4); lending limits (12 CFR part 32);
and, limits on improvements to other real estate owned (12 CFR part 34,
subpart E).
The OCC proposes to revise the calculations used in those sections
that currently reference ALLL to also reference ACL, once a banking
organization has adopted the FASB standard. This proposed conforming
revision will ensure that banking organizations will not experience a
material decrease in any of the affected limits due to the adoption of
CECL.
In addition, the OCC proposes to make conforming edits to the
terminology used in the OCC's stress testing regulation at 12 CFR part
46 to incorporate the new CECL methodology.
2. Board Regulations
Certain other regulations of the Board reflect the current practice
of banking organizations establishing ALLL under the incurred loss
methodology to cover estimated credit losses on loans, lease financing
receivables, or other extensions of credit. As discussed in this
proposal, banking organizations that adopt CECL will hold ACL to cover
expected credit losses on a broader array of financial assets than
covered by the ALLL. As a result, the proposal would make conforming
changes to those other regulations.
Specifically, the proposal would amend the definition of ``capital
stock and surplus'' in the Board's Regulation H, 12 CFR part 208, to
include the balance of a member bank's allowance for credit losses.
Similarly, the proposal would incorporate ``allowance for credit
losses'' in the definition of ``capital stock and surplus'' in the
Board's Regulation K, 12 CFR part 211; Regulation W, 12 CFR part 223;
and Regulation Y, 12 CFR part 225. A related change would be made to
the definition of unimpaired capital and unimpaired surplus in the
Board's Regulation O, 12 CFR part 215.
The proposal would make a similar change to the Board's Regulation
K relating to the establishment of an allocated transfer risk reserve
(ATRR). Specifically, the proposal would replace, for CECL adopters,
all references to ALLL, in the section relating to the accounting
treatment of ATRR, with ACL.
The proposal incorporates technical amendments to Sec. 225.127 of
the Board's Regulation Y to provide corrected reference citations to
sections of Regulation Y that have been revised and renumbered.
Finally, the Board is proposing to amend its stress testing rules
in the Board's Regulation YY, 12 CFR part 252, to address the changes
made in U.S. GAAP following the issuance of ASU No. 2016-13.
Specifically, the Board is proposing to require a banking organization
that has adopted CECL to include its provision for credit losses
beginning in the 2020 stress test cycle, which would include provisions
calculated under ASU No. 2016-13, instead of its provision for loan and
lease losses, in its stress testing methodologies and data and
information required to be submitted to the Board and that the
disclosure of the results of those stress tests includes estimates of
those provisions. To promote comparability of stress test results
across firms, the proposal would provide that, for the 2018 and 2019
stress test cycles, a banking organization would continue to use its
provision for loan and lease losses, as would be calculated under the
incurred loss methodology, even if the firm adopted CECL in 2019.
Finally, under the proposal, a banking organization that does not adopt
CECL until 2021 would not be required to include its provision for
credit losses for these purposes until the 2021 stress test cycle. The
following table describes the stress test cycles in which a banking
organization would be required to use its provision for credit losses
instead of the provision for loan and lease losses, based on varying
dates of adoption of ASU No. 2016-13.
Table 2--Summary of Use of Provisions in 2019-2021 Stress Test Cycles
----------------------------------------------------------------------------------------------------------------
Year of adoption of ASU No. 2016-13 2019 Stress test cycle 2020 Stress test cycle 2021 Stress test cycle
----------------------------------------------------------------------------------------------------------------
2019................................. Provision for loan and Provision for credit Provision for credit
lease losses. losses. losses.
2020................................. Provision for loan and Provision for credit Provision for credit
lease losses. losses. losses.
2021................................. Provision for loan and Provision for loan and Provision for credit
lease losses. lease losses. losses.
----------------------------------------------------------------------------------------------------------------
The proposal would make a similar change to the Board's company-run
stress test requirements to require a banking organization that has
adopted CECL, beginning in the 2020 stress test cycle, to incorporate
the effects of the maintenance of ACL when estimating the impact on pro
forma regulatory capital levels and pro forma capital ratios.
Question 8: The Board seeks comment on whether requiring a banking
organization that adopts CECL in 2019 not to include provisions for
credit losses in the 2019 stress test cycle would create additional
burden or complexity.
Question 9: The Board seeks comment on whether, apart from the
approach described, additional changes should be made to its stress
testing rules to address the accounting change.
3. FDIC Regulations
The proposal would also make conforming amendments to references to
provisions or ALLL in the FDIC's regulations. Specifically, the
proposal would replace, for CECL adopters, all references to ALLL with
ACL (as applicable) in the FDIC's capital rules
[[Page 22321]]
codified at 12 CFR part 324, including in the definitions of
``identified losses'' and ``standardized total risk-weighted assets.''
The proposal would also make the same conforming changes to the
following FDIC regulations by replacing all references to ALLL with ACL
as applicable: 12 CFR parts 327, 347 and 390. Finally, consistent with
the proposed changes to the Board's stress testing rules, the proposal
would make similar conforming changes to the FDIC's stress testing
rules codified at 12 CFR part 325.
F. Additional Requests for Comment
The agencies seek comment on all aspects of the proposal. Comments
are requested about the potential advantages of the proposal in
ensuring the individual safety and soundness of these banking
organizations as well as on the stability of the financial system.
III. Regulatory Analyses
A. Paperwork Reduction Act
Certain provisions of the proposed rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act (PRA) of 1995 (44 U.S.C. 3501-3521). In accordance with
the requirements of the PRA, the agencies may not conduct or sponsor,
and a respondent is not required to respond to, an information
collection unless it displays a currently valid Office of Management
and Budget (OMB) control number. The agencies reviewed the proposed
rule and determined that the proposed rule revises certain disclosure
and reporting requirements that have been previously cleared by the OMB
under various control numbers. The agencies are proposing to extend for
three years, with revision, these information collections. The
information collections for the disclosure requirements contained in
this proposed rulemaking have been submitted by the OCC and FDIC to OMB
for review and approval under section 3507(d) of the PRA (44 U.S.C.
3507(d)) and Sec. 1320.11 of the OMB's implementing regulations (5 CFR
part 1320). The Board reviewed the proposed rule under the authority
delegated to the Board by OMB.
Comments are invited on:
a. Whether the collections of information are necessary for the
proper performance of the agencies' functions, including whether the
information has practical utility;
b. The accuracy or the estimate of the burden of the information
collections, including the validity of the methodology and assumptions
used;
c. Ways to enhance the quality, utility, and clarity of the
information to be collected;
d. Ways to minimize the burden of the information collections on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
e. Estimates of capital or startup costs and costs of operation,
maintenance, and purchase of services to provide information.
Disclosure Burden--Advanced Approaches Banking Organizations
Current Actions
Section 173 of the capital rules requires that advanced approaches
banking organizations publicly disclose capital-related information as
provided in a series of 13 tables. For advanced approaches banking
organizations, the agencies propose revisions to Tables 2, 3, and 5 in
section 173 of the capital rules to reflect the adoption of CECL. In
addition, the agencies are proposing revisions to those tables for
electing advanced approaches banking organizations to disclose two sets
of regulatory capital ratios. One set would reflect such banking
organization's capital ratios with the CECL transition provision and
the other set would reflect the banking organization's capital ratios
on a fully phased-in basis. This aspect of the proposed rule affects
the below-listed information collections.
The changes in the disclosure requirements to Tables 2, 3, and 5 in
section 173 of the capital rules would result in an increase in the
average hours per response per agency of 48 hours for the initial setup
burden. In addition, the changes in the disclosure requirements to
Tables 2, 3, and 5 in section 173 of the capital rules would result in
an increase in the average hours per response per agency of 6 hours for
ongoing (quarterly) burden.\22\
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\22\ In an effort to provide transparency, the total cumulative
burden for each agency is shown. In addition, as stated in the
Notice of Proposed Rulemaking, Simplifications to the Capital Rule
Pursuant to the Economic Growth and Regulatory Paperwork Reduction
Act of 1996, 82 FR 49984 (October 27, 2017), in order to be
consistent across the agencies, the agencies are also applying a
conforming methodology for calculating the burden estimates.
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Proposed Revision, With Extension, of the Following Information
Collections
OCC
Title of Information Collection: Risk-Based Capital Standards:
Advanced Capital Adequacy Framework.
Frequency: Quarterly, annual.
Affected Public: Businesses or other for-profit.
Respondents: National banks, state member banks, state nonmember
banks, and state and federal savings associations.
OMB control number: 1557-0318.
Estimated number of respondents: 1,365 (of which 18 are advanced
approaches institutions).
Estimated average hours per response:
Minimum Capital Ratios
Recordkeeping (Ongoing)--16.
Standardized Approach
Recordkeeping (Initial setup)--122.
Recordkeeping (Ongoing)--20.
Disclosure (Initial setup)--226.25.
Disclosure (Ongoing quarterly)--131.25.
Advanced Approaches
Recordkeeping (Initial setup)--460.
Recordkeeping (Ongoing)--540.77.
Recordkeeping (Ongoing quarterly)--20.
Disclosure (Initial setup)--328.
Disclosure (Ongoing)--5.78.
Disclosure (Ongoing quarterly)--41.
Proposed revisions estimated annual burden: 432 hours.
Estimated annual burden hours: 1,136 hours initial setup, 64,945
hours for ongoing.
Board
Title of Information Collection: Recordkeeping and Disclosure
Requirements Associated with Regulation Q.
Frequency: Quarterly, annual.
Affected Public: Businesses or other for-profit.
Respondents: State member banks (SMBs), bank holding companies
(BHCs), U.S. intermediate holding companies (IHCs), savings and loan
holding companies (SLHCs), and global systemically important bank
holding companies (GSIBs).
Legal authorization and confidentiality: This information
collection is authorized by section 38(o) of the Federal Deposit
Insurance Act (12 U.S.C. 1831o(c)), section 908 of the International
Lending Supervision Act of 1983 (12 U.S.C. 3907(a)(1)), section 9(6) of
the Federal Reserve Act (12 U.S.C. 324), and section 5(c) of the Bank
Holding Company Act (12 U.S.C. 1844(c)). The obligation to respond to
this information collection is mandatory. If a respondent considers the
information to be trade secrets and/or privileged such information
could be withheld from the public under the authority of the Freedom of
Information Act (5 U.S.C. 552(b)(4)). Additionally, to the extent that
such information may be contained in an examination report such
[[Page 22322]]
information could also be withheld from the public (5 U.S.C. 552
(b)(8)).
Agency form number: FR Q.
OMB control number: 7100-0313.
Estimated number of respondents: 1,431 (of which 17 are advanced
approaches institutions).
Estimated average hours per response:
Minimum Capital Ratios
Recordkeeping (Ongoing)--16.
Standardized Approach
Recordkeeping (Initial setup)--122.
Recordkeeping (Ongoing)--20.
Disclosure (Initial setup)--226.25.
Disclosure (Ongoing quarterly)--131.25.
Advanced Approaches
Recordkeeping (Initial setup)--460.
Recordkeeping (Ongoing)--540.77.
Recordkeeping (Ongoing quarterly)--20.
Disclosure (Initial setup)--328.
Disclosure (Ongoing)--5.78.
Disclosure (Ongoing quarterly)--41.
Disclosure (Table 13 quarterly)--5.
Risk-based Capital Surcharge for GSIBs
Recordkeeping (Ongoing)--0.5.
Proposed revisions estimated annual burden: 456 hours.
Estimated annual burden hours: 1,136 hours initial setup, 78,591
hours for ongoing.
FDIC
Title of Information Collection: Regulatory Capital Rules.
Frequency: Quarterly, annual.
Affected Public: Businesses or other for-profit.
Respondents: State nonmember banks, state savings associations, and
certain subsidiaries of those entities.
OMB control number: 3064-0153.
Estimated number of respondents: 3,637 (of which 2 are advanced
approaches institutions).
Estimated average hours per response:
Minimum Capital Ratios
Recordkeeping (Ongoing)--16.
Standardized Approach
Recordkeeping (Initial setup)--122.
Recordkeeping (Ongoing)--20.
Disclosure (Initial setup)--226.25.
Disclosure (Ongoing quarterly)--131.25.
Advanced Approaches
Recordkeeping (Initial setup)--460.
Recordkeeping (Ongoing)--540.77.
Recordkeeping (Ongoing quarterly)--20.
Disclosure (Initial setup)--328.
Disclosure (Ongoing)--5.78.
Disclosure (Ongoing quarterly)--41.
Proposed revisions estimated annual burden: 96 hours.
Estimated annual burden hours: 1,136 hours initial setup, 133,038
hours for ongoing.
Reporting Burden--FFIEC and Board Forms
Current Actions
The agencies also plan to make changes to certain FFIEC and Board
reporting forms and/or their related instructions as a result of the
issuance of ASU 2016-13. In particular, the forms and/or related
instructions for the following FFIEC reports could be affected:
Consolidated Reports of Condition and Income (Call Reports) (FFIEC 031,
FFIEC 041, and FFIEC 051; OMB No. 1557-0081, 7100-0036, and 3064-0052),
Report of Assets and Liabilities of U.S. Branches and Agencies of
Foreign Banks (FFIEC 002; OMB No. 7100-0032), Report of Assets and
Liabilities of a Non-U.S. Branch that is Managed or Controlled by a
U.S. Branch or Agency of a Foreign (Non-U.S.) Bank (FFIEC 002S; OMB No.
7100-0032), Annual Dodd-Frank Act Company-Run Stress Test Report for
Depository Institutions and Holding Companies with $10-$50 Billion in
Total Consolidated Assets (FFIEC 016; OMB No. 1557-0311, 7100-0356, and
3064-0187), Foreign Branch Report of Condition (FFIEC 030; OMB No.
1557-0099, 7100-0071, and 3064-0011), Abbreviated Foreign Branch Report
of Condition (FFIEC 030S; OMB No. 1557-0099, 7100-0071, and 3064-0011),
and Regulatory Capital Reporting for Institutions Subject to the
Advanced Capital Adequacy Framework (FFIEC 101; OMB No. 1557-0239,
7100-0319, and 3064-0159). The forms and/or related instructions for
the following Board reports could be affected: Financial Statements of
Foreign Subsidiaries of U.S. Banking Organizations (FR 2314; OMB No.
7100-0073), Domestic Finance Company Report of Consolidated Assets and
Liabilities (FR 2248; OMB No. 7100-0005), Weekly Report of Selected
Assets and Liabilities of Domestically Chartered Commercial Banks and
U.S. Branches and Agencies of Foreign Banks (FR 2644; OMB No. 7100-
0075), Consolidated Report of Condition and Income for Edge and
Agreement Corporations (FR 2886b; OMB No. 7100-0086), Financial
Statements of U.S. Nonbank Subsidiaries Held by Foreign Banking
Organizations (FR Y-7N; 7100-0125), Consolidated Financial Statements
for Holding Companies (FR Y-9C; OMB No. 7100-0128), Parent Company Only
Financial Statements for Large Holding Companies (FR Y-9LP; OMB No.
7100-0128), Parent Company Only Financial Statements for Small Holding
Companies (FR Y-9SP; OMB No. 7100-0128), Financial Statements of U.S.
Nonbank Subsidiaries of U.S. Holding Companies (FR Y-11; OMB No. 7100-
0244), Capital Assessments and Stress Testing (FR Y-14; OMB No. 7100-
0341), and Banking Organization Systemic Risk Report (FR Y-15; OMB No.
7100-0352). These changes to the FFIEC forms and/or instructions as
well as the Board forms and/or instructions would be addressed in
separate Federal Register notices.
B. Regulatory Flexibility Act
OCC: The Regulatory Flexibility Act, 5 U.S.C. 601 et seq., (RFA),
requires an agency, in connection with a proposed rule, to prepare an
Initial Regulatory Flexibility Analysis describing the impact of the
rule on small entities (defined by the Small Business Administration
(SBA) for purposes of the RFA to include commercial banks and savings
institutions with total assets of $550 million or less and trust
companies with total revenue of $38.5 million or less) or to certify
that the proposed rule would not have a significant economic impact on
a substantial number of small entities. As of December 31, 2016, the
OCC supervised 956 small entities. The rule would apply to all OCC-
supervised entities that are not subject to the advanced approaches
risk-based capital rules, and thus potentially affects a substantial
number of small entities. To determine whether a proposed rule would
have a significant effect on those small entities, the OCC considers
whether the economic impact associated with the proposed rule is
greater than or equal to either 5 percent of a small entity's total
annual salaries and benefits or 2.5 percent of a small entity's total
non-interest expense. The OCC estimates the proposed rule would not
generate any costs for affected small entities. The proposed rule may
generate a benefit for those small entities that elect the transition
of approximately $13,000 per electing small entity supervised by the
OCC. This estimate is based on the potential savings to small entities
from not needing to raise additional capital related to CECL
implementation due to the proposed regulatory capital transition. The
estimated benefit is not significant in relation to the measures
described above. Therefore, the OCC certifies that the proposed rule
would not have a significant economic impact
[[Page 22323]]
on a substantial number of OCC-supervised small entities.
Board: The RFA requires an agency to consider whether the rules it
proposes will have a significant economic impact on a substantial
number of small entities.\23\ In connection with a proposed rule, the
RFA requires an agency to prepare an initial regulatory flexibility
analysis describing the impact of the rule on small entities or to
certify that the proposed rule would not have a significant economic
impact on a substantial number of small entities. An initial regulatory
flexibility analysis must contain (1) a description of the reasons why
action by the agency is being considered; (2) a succinct statement of
the objectives of, and legal basis for, the proposed rule; (3) a
description of, and, where feasible, an estimate of the number of small
entities to which the proposed rule will apply; (4) a description of
the projected reporting, recordkeeping, and other compliance
requirements of the proposed rule, including an estimate of the classes
of small entities that will be subject to the requirement and the type
of professional skills necessary for preparation of the report or
record; (5) an identification, to the extent practicable, of all
relevant Federal rules which may duplicate, overlap with, or conflict
with the proposed rule; and (6) a description of any significant
alternatives to the proposed rule which accomplish its stated
objectives.
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\23\ Under regulations issued by the Small Business
Administration, a small entity includes a depository institution,
bank holding company, or savings and loan holding company with total
assets of $550 million or less and trust companies with total assets
of $38.5 million or less. As of December 31, 2017, there were
approximately 3,384 small bank holding companies, 230 small savings
and loan holding companies, and 559 small state member banks.
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The Board has considered the potential impact of the proposed rule
on small entities in accordance with the RFA. Based on its analysis and
for the reasons stated below, the Board believes that this proposed
rule will not have a significant economic impact on a substantial
number of small entities. Nevertheless, the Board is publishing and
inviting comment on this initial regulatory flexibility analysis. A
final regulatory flexibility analysis will be conducted after comments
received during the public comment period have been considered.
As discussed in detail above, the agencies are proposing to
identify which credit loss allowances under GAAP (ASU No. 2016-13) are
eligible for inclusion in regulatory capital and to provide banking
organization the option to phase in, over a three-year period, the
effect on regulatory capital that may result from adoption of this
accounting standard (ASU No. 2016-13). The proposal also would make
conforming amendments to other regulations.
The Board has authority under the International Lending Supervision
Act (ILSA) \24\ and the PCA provisions of the Federal Deposit Insurance
Act \25\ to establish regulatory capital requirements for the
institutions it regulates. For example, ILSA directs each Federal
banking agency to cause banking institutions to achieve and maintain
adequate capital by establishing minimum capital requirements as well
as by other means that the agency deems appropriate.\26\ The PCA
provisions of the Federal Deposit Insurance Act direct each Federal
banking agency to specify, for each relevant capital measure, the level
at which an insured depository institution is well capitalized,
adequately capitalized, undercapitalized, and significantly
undercapitalized.\27\ In addition, the Board has authority to establish
regulatory capital standards for bank holding companies under ILSA \28\
and the Bank Holding Company Act \29\ and for savings and loan holding
companies under the Home Owners Loan Act.\30\
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\24\ 12 U.S.C. 3901-3911.
\25\ 12 U.S.C. 1831o.
\26\ 12 U.S.C. 3907(a)(1).
\27\ 12 U.S.C. 1831o(c)(2).
\28\ See 12 U.S.C. 3907.
\29\ See 12 U.S.C. 1844.
\30\ See 12 U.S.C. 1467a(g)(1).
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All banking organizations will be required to adopt ASU No. 2016-
13, which will likely result in an increase in credit loss allowances.
An increase in a banking organization's credit loss allowances will
reduce the firm's retained earnings and therefore its CET1 capital. The
proposed rule would identify those credit loss allowances under ASU No.
2016-13 that would be eligible for inclusion in regulatory capital.
Further, the proposed rule would introduce a three-year transition
period, which would allow a banking organization to phase in the
immediate impact of adoption of ASU No. 2016-13. During the transition
period, a banking organization that elects to use the phase-in would
report higher capital than it otherwise would under the current capital
rules.
The proposed rule also would make conforming amendments to certain
of the Board's other regulations. In particular, certain other
regulations of the Board include a definition of ``capital stock and
surplus,'' which reflect the current practice of banking organizations
establishing ALLL to cover estimated credit losses on loans, lease
financing receivables, or other extensions of credit. The proposed rule
would allow banking organizations that are subject to these regulations
to also include in the definition of ``capital stock and surplus''
those credit loss allowances under ASU No. 2016-13 that would be
eligible for inclusion in regulatory capital. Most aspects of the
proposed rule would apply to all state member banks, as well as
generally all bank holding companies and savings and loan holding
companies that are subject to the Board's capital rule. However, in
virtually all cases, the Board's capital rule only applies to bank
holding companies and savings and loan holding companies with greater
than $1 billion in total assets. Thus, virtually all bank holding
companies that would be subject to the proposed rule do not qualify as
small banking organizations. With respect to state member banks that do
qualify as small banking organizations, the proposed revision to the
Board's capital rule would should have an economic benefit as they will
be able to include additional credit loss allowances into regulatory
capital than they otherwise would under the current capital rules.
Therefore, the Board estimates the proposed rule would not generate any
costs for affected small entities.
The proposed rule would not impact the recordkeeping and reporting
requirements to which affected small banking organizations are
currently subject. The agencies anticipate updating the relevant
reporting forms at a later date.
The Board does not believe that the proposed rule duplicates,
overlaps, or conflicts with any other Federal rules. In light of the
foregoing, the Board does not believe that the proposed rule, if
adopted in final form, would have a significant economic impact on a
substantial number of small entities and therefore believes that there
are no significant alternatives to the proposed rule that would reduce
the economic impact on small banking organizations supervised by the
Board. Nonetheless, the Board seeks comment on whether the proposed
rule would impose undue burdens on, or have unintended consequences
for, small organizations, and whether there are ways such potential
burdens or consequences could be minimized in a manner consistent with
the purpose of the proposed rule. A final regulatory flexibility
analysis will be conducted after consideration of comments received
during the public comment period.
[[Page 22324]]
FDIC: Statement of the Regulatory Flexibility Act Requirements
The RFA generally requires that, in connection with a notice of
proposed rulemaking, an agency prepare and make available for public
comment an initial regulatory flexibility analysis describing the
impact of the proposed rule on small entities.\31\ A regulatory
flexibility analysis is not required, however, if the agency certifies
that the rule will not have a significant economic effect on a
substantial number of small entities. The SBA has defined ``small
entities'' to include banking organizations with total assets less than
or equal to $550 million.\32\
---------------------------------------------------------------------------
\31\ 5 U.S.C. 601 et seq.
\32\ 13 CFR 121.201 (as amended, effective December 2, 2014).
---------------------------------------------------------------------------
Description of Need and Policy Objectives
In June 2016, the FASB issued ASU No. 2016-13, which revises the
accounting for credit losses under U.S. GAAP. CECL differs from the
incurred loss methodology currently implemented by institutions in
several key respects. CECL requires banking organizations to recognize
lifetime expected credit losses for financial assets measured at
amortized cost, not just those credit losses that are probable of
having been incurred as of the reporting date. In addition to
maintaining the current requirement for banking organizations to
consider past events and current conditions, CECL requires the
incorporation of reasonable and supportable forecasts in developing an
estimate of lifetime expected credit losses.
Upon adoption of CECL, a banking organization will record a one-
time adjustment to its allowance for credit losses as of the beginning
of its fiscal year of adoption equal to the difference, if any, between
the amount of credit loss allowances required under the incurred loss
methodology and the amount of credit loss allowances required under the
CECL methodology. Changes to retained earnings, DTAs, and ALLL affect a
banking organization's calculation of regulatory capital.\33\ To
address changes made in U.S. GAAP following the FASB's issuance of ASU
No. 2106-13, the FDIC is proposing to amend its capital rule \34\ to
give banking organizations the option to phase in the immediate,
potentially adverse effects of CECL adoption over a three-year period.
---------------------------------------------------------------------------
\33\ 12 CFR 3.20 (OCC); 12 CFR 217.20 (Board); 12 CFR 324.20
(FDIC).
\34\ Under section 37 of the Federal Deposit Insurance Act, the
accounting principles applicable to reports or statements required
to be filed with the agencies by all insured depository institutions
must be uniform and consistent with U.S. GAAP. See 12 U.S.C.
1831n(a)(2)(A).
---------------------------------------------------------------------------
Description of the Proposal
A description of the proposal is presented Section II: Description
of the Proposed Rule. Please refer to it for further information.
Other Federal Rules
The FDIC has not identified any likely duplication, overlap, and/or
potential conflict between the proposed rule and any federal rule.
Economic Impacts on Small Entities
The proposed rule could affect all FDIC-supervised small entities.
The FDIC supervises 3,637 depository institutions, of which 2,924 are
defined as small banking entities by the terms of the RFA.\35\ However,
the number of small entities that elect to utilize the proposed three-
year transition schedule is difficult to estimate. Utilization will
depend on an institution's business model, the preferences of senior
management or ownership, the assets held by the institution and
reasonable expectation of future macroeconomic conditions, among other
things.
---------------------------------------------------------------------------
\35\ FDIC Call Report data as of December 31, 2017.
---------------------------------------------------------------------------
The proposal, if implemented, would benefit small institutions who
adopt the proposed three-year transition schedule by allowing them to
phase-in any increases in capital associated with the implementation of
CECL over that time. The three year transition schedule would reduce
the costs associated with potential increases in capital relative to
the immediate impact of CECL adoption by allowing institutions to raise
capital levels gradually, over-time. It is difficult to accurately
estimate the potential benefit for small institutions with available
data because it depends on the assets held by small institutions, their
provision activity, future economic conditions, and the decisions of
senior management, among other things.
The proposal would pose some small regulatory costs for
institutions that opt to utilize the three-year transition schedule.
Changes in disclosure requirements for capital rules would result in an
estimated increase of 48 hours on average hours per response per agency
for the initial setup burden, as well as an estimated increase of 6
hours per response per agency for ongoing (quarterly) burden.
Additionally, small entities that are subsidiaries of large complex
institutions may have additional regulatory costs associated with
changes in disclosure requirements. However, those costs are also
likely to be small. Further, the small regulatory costs associated with
implementing proposed three-year transition schedule will be
demonstrably less than the benefits posed by utilizing the schedule for
those institutions that opt to utilize it.
Therefore, the FDIC does not believe that the proposed rule would
have a significant economic impact on a substantial number of small
entities.
Alternatives Considered
As an alternative to the proposed rule, the FDIC considered
allowing CECL to go into effect with no accompanying action by the
financial regulators. However, this alternative would likely result in
higher costs for small entities. Additionally, the FDIC considered the
alternative of a longer transition period of up to five years. While
this alternative might reduce the costs of adopting CECL more than the
proposed alternative, it also heightens the risk of capital increases
coinciding with a potential future downturn in the business cycle. The
coincidence of rising capital requirements during a future downturn in
the business cycle could reduce the benefits of the proposed rule and
have deleterious effects on lending activity.
Solicitation of Comments
The FDIC invites comments on all aspects of the supporting
information provided in this RFA section. Particularly, the FDIC
invites comments on the effects the proposed rule will have on capital
for institutions and the magnitude of those effects.
C. Plain Language
Section 722 of the Gramm-Leach-Bliley Act requires the federal
banking agencies to use plain language in all proposed and final rules
published after January 1, 2000. The agencies have sought to present
the proposed rule in a simple and straightforward manner, and invite
comment on the use of plain language. For example:
Have the agencies organized the material to suit your
needs? If not, how could they present the proposed rule more clearly?
Are the requirements in the proposed rule clearly stated?
If not, how could the proposed rule be more clearly stated?
Do the regulations contain technical language or jargon
that is not clear? If so, which language requires clarification?
Would a different format (grouping and order of sections,
use of headings, paragraphing) make the regulation easier to
understand? If so, what changes would achieve that?
[[Page 22325]]
Would more, but shorter, sections be better? If so, which
sections should be changed?''
What other changes can the agencies incorporate to make
the regulation easier to understand?
D. OCC Unfunded Mandates Reform Act of 1995
The OCC analyzed the proposed rule under the factors set forth in
the Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1532). Under
this analysis, the OCC considered whether the proposed rule includes a
federal mandate that may result in the expenditure by state, local, and
Tribal governments, in the aggregate, or by the private sector, of $100
million or more in any one year (adjusted for inflation). The OCC has
determined that this proposed rule would not result in expenditures by
state, local, and Tribal governments, or the private sector, of $100
million or more in any one year. Accordingly, the OCC has not prepared
a written statement to accompany this proposal.
E. Riegle Community Development and Regulatory Improvement Act of 1994
The Riegle Community Development and Regulatory Improvement Act of
1994 (RCDRIA) requires that each federal banking agency, in determining
the effective date and administrative compliance requirements for new
regulations that impose additional reporting, disclosure, or other
requirements on insured depository institutions, consider, consistent
with principles of safety and soundness and the public interest, any
administrative burdens that such regulations would place on depository
institutions, including small depository institutions, and customers of
depository institutions, as well as the benefits of such regulations.
In addition, new regulations and amendments to regulations that impose
additional reporting, disclosures, or other new requirements on insured
depository institutions generally must take effect on the first day of
a calendar quarter that begins on or after the date on which the
regulations are published in final form.\36\
---------------------------------------------------------------------------
\36\ 12 U.S.C. 4802.
---------------------------------------------------------------------------
The agencies note that comment on these matters has been solicited
in other sections of this Supplementary Information section, and that
the requirements of RCDRIA will be considered as part of the overall
rulemaking process. In addition, the agencies also invite any other
comments that further will inform the agencies' consideration of
RCDRIA.
List of Subjects
12 CFR Part 1
Banks, banking, National banks, Reporting and recordkeeping
requirements, Securities.
12 CFR Part 3
Administrative practice and procedure, Capital, National banks,
Risk.
12 CFR Part 5
Administrative practice and procedure, Federal savings
associations, National banks, Reporting and recordkeeping requirements,
Securities.
12 CFR Part 23
Banks, banking, National banks, Lease financing transactions,
Leasing, Reporting and recordkeeping requirements.
12 CFR Part 24
Affordable housing, Community development, Credit, Investments,
Economic development and job creation, Low- and moderate-income areas,
Low- and moderate-income housing, National banks, Public welfare
investments, Reporting and recordkeeping requirements, Rural areas,
Small businesses, Tax credit investments.
12 CFR Part 32
National banks, Reporting and recordkeeping requirements.
12 CFR Part 34
Appraisal, Appraiser, Banks, banking, Consumer protection, Credit,
Mortgages, National banks, Reporting and recordkeeping requirements,
Savings associations, Truth in lending.
12 CFR Part 46
Banking, Banks, Capital, Disclosures, National banks,
Recordkeeping, Risk, Savings associations, Stress test.
12 CFR Part 208
Confidential business information, Crime, Currency, Federal Reserve
System, Mortgages, reporting and recordkeeping requirements,
Securities.
12 CFR Part 211
Exports, Federal Reserve System, Foreign banking, Holding
companies, Investments, Reporting and recordkeeping requirements.
12 CFR Part 215
Credit, Penalties, Reporting and recordkeeping requirements.
12 CFR Part 217
Administrative practice and procedure, Banks, Banking, Capital,
Federal Reserve System, Holding companies, Reporting and recordkeeping
requirements, Risk, Securities.
12 CFR Part 223
Banks, Banking, Federal Reserve System.
12 CFR Part 225
Administrative practice and procedure, Banks, banking, Federal
Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.
12 CFR Part 252
Administrative practice and procedure, Banks, banking, Federal
Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.
12 CFR Part 324
Administrative practice and procedure, Banks, banking, Reporting
and recordkeeping requirements, Savings associations.
12 CFR Part 325
Banks, banking, Reporting and recordkeeping requirements.
12 CFR Part 327
Bank deposit insurance, Banks, banking, Savings associations.
12 CFR Part 347
Authority delegation (Government agencies), Bank deposit insurance,
Banks, banking, Credit, Foreign banking, Investments, Reporting and
recordkeeping requirements, U.S. Investments abroad.
12 CFR Part 390
Administrative practice and procedure, Advertising, Aged, Civil
rights, Conflict of interests, Credit, Crime, Equal employment
opportunity, Fair housing, Government employees, Individuals with
disabilities, Reporting and recordkeeping requirements, Savings
associations.
Office of the Comptroller of the Currency
For the reasons set out in the joint preamble, the OCC proposes to
amend 12 CFR chapter I as follows.
PART 1--INVESTMENT SECURITIES
1. The authority citation for part 1 continues to read as follows:
Authority: 12 U.S.C. 1 et seq., 24 (Seventh), and 93a.
[[Page 22326]]
2. Section 1.2 is amended by revising paragraph (a)(2) to read as
follows:
Sec. 1.2 Definitions.
(a) * * *
(2) The balance of a bank's allowance for loan and lease losses or
allowance for credit losses, as applicable, not included in the bank's
Tier 2 capital, for purposes of the calculation of risk-based capital
described in paragraph (a)(1) of this section, as reported in the
bank's Call Report.
* * * * *
PART 3--CAPITAL ADEQUACY STANDARDS
0
3. The authority citation for part 3 continues to read as follows:
Authority: 12 U.S.C. 93a, 161, 1462, 1462a, 1463, 1464, 1818,
1828(n), 1828 note, 1831n note, 1835, 3907, 3909, and 5412(b)(2)(B).
0
4. Section 3.2 is amended by:
0
a. Adding the definitions of Allowance for credit losses (ACL) in
alphabetical order;
0
b. Revising the definition of Carrying value;
0
c. Adding the definition of Current expected credit losses (CECL) in
alphabetical order; and
0
d. Revising the definition of Eligible credit reserves and paragraph
(2) of the definition of Standardized total risk-weighted assets.
The revisions and additions read as follows:
Sec. 3.2 Definitions.
* * * * *
Allowance for credit losses (ACL) means, with respect to a national
bank or Federal savings association that has adopted CECL, valuation
allowances that have been established through a charge against earnings
or retained earnings for expected credit losses on financial assets
measured at amortized cost and a lessor's net investment in leases that
have been established to reduce the amortized cost basis of the assets
to amounts expected to be collected as determined in accordance with
GAAP. For purposes of this part, allowance for credit losses includes
allowances for expected credit losses on off-balance sheet credit
exposures not accounted for as insurance as determined in accordance
with GAAP. Allowance for credit losses excludes ``allocated transfer
risk reserves'' and allowances created that reflect credit losses on
purchased credit-deteriorated assets and available-for-sale debt
securities.
* * * * *
Carrying value means, with respect to an asset, the value of the
asset on the balance sheet of the national bank or Federal savings
association as determined in accordance with GAAP. For all assets other
than available-for-sale debt securities or purchased credit-
deteriorated assets, the carrying value is not reduced by any
associated credit loss allowance that is determined in accordance with
GAAP.
* * * * *
Current expected credit losses (CECL) means the current expected
credit losses methodology under GAAP.
* * * * *
Eligible credit reserves means:
(1) For a national bank or Federal savings association that has not
adopted CECL, all general allowances that have been established through
a charge against earnings to cover estimated credit losses associated
with on- or off-balance sheet wholesale and retail exposures, including
the ALLL associated with such exposures, but excluding allocated
transfer risk reserves established pursuant to 12 U.S.C. 3904 and other
specific reserves created against recognized losses; and
(2) For a national bank or Federal savings association that has
adopted CECL, all general allowances that have been established through
a charge against earnings or retained earnings to cover expected credit
losses associated with on- or off-balance sheet wholesale and retail
exposures, including ACL associated with such exposures. Eligible
credit reserves exclude allocated transfer risk reserves established
pursuant to 12 U.S.C. 3904, allowances that reflect credit losses on
purchased credit-deteriorated assets and available-for-sale debt
securities, and other specific reserves created against recognized
losses.
* * * * *
Standardized total risk-weighted assets * * *
(2) Any amount of a national bank's or Federal savings
association's allowance for loan and lease losses or allowance for
credit losses, as applicable, that is not included in tier 2 capital
and any amount of ``allocated transfer risk reserves.''
* * * * *
Sec. 3.10 [Amended]
0
5. Section 3.10(c)(3)(ii)(A) is amended by removing the words
``allowance for loan and lease losses'' and adding in their place the
words ``allowance for loan and lease losses or allowance for credit
losses, as applicable,''.
Sec. Sec. 3.20, 3.22, and 3.124 [Amended]
0
6. Sections 3.20, 3.22, and 3.124 are amended by removing ``ALLL''
everywhere it appears and adding in its place ``ALLL or ACL, as
applicable,'', except the second occurrence in Sec. 3.20(d)(3) where
``ALLL or ACL, as applicable'' is added in its place.
Sec. 3.63 [Amended]
0
7. Section 3.63 is amended in Table 5 by removing ``allowance for loan
and lease losses,'' and ``allowance for loan and lease losses'' and
adding in their place ``allowance for loan and lease losses or
allowance for credit losses, as applicable,'' and removing ``ALLL'' and
adding in its place ``ALLL or ACL, as applicable''.
Sec. 3.173 [Amended]
0
8. Section 3.173 is amended:
0
a. In Table 2, by adding paragraph (e);
0
b. In Table 3, by revising paragraph (e), redesignating paragraph (f)
as paragraph (g), and adding a new paragraph (f); and
0
c. In Table 5, by:
0
i. Removing ``allowance for loan and lease losses,'' and ``allowance
for loan and lease losses'' and adding in their place ``allowance for
loan and lease losses or allowance for credit losses, as applicable,'';
and
0
ii. Revising paragraph (g).
The additions and revisions read as follows:
Sec. 3.173 Disclosures by certain advanced approaches national banks
or Federal savings associations.
* * * * *
[[Page 22327]]
Table 2 to Sec. 3.173--Capital Structure
------------------------------------------------------------------------
------------------------------------------------------------------------
* * * * * * *
(e).................... (1) Whether the
national bank or
Federal savings
association has
elected to phase in
recognition of the
transitional
adjustment amount as
defined in Sec.
3.301.
(2) The national
bank's or Federal
savings association's
common equity tier 1
capital, tier 1
capital, and total
capital without
including the
transitional
adjustment amount.
------------------------------------------------------------------------
Table 3 to Sec. 3.173--Capital Adequacy
------------------------------------------------------------------------
------------------------------------------------------------------------
* * * * * * *
(e).................... (1) Common equity tier
1, tier 1 and total
risk-based capital
ratios reflecting the
transition provisions
described in Sec.
3.301:
(A) For the top
consolidated group;
and
(2) For each
depository
institution
subsidiary.
(f).................... Common equity tier 1,
tier 1 and total risk-
based capital ratios
reflecting the full
adoption of CECL:
(1) For the top
consolidated group;
and
(2) For each
depository
institution
subsidiary.
* * * * * * *
------------------------------------------------------------------------
* * * * *
Table 5 \1\ to Sec. 3.173--Credit Risk: General Disclosures
------------------------------------------------------------------------
------------------------------------------------------------------------
* * * * * * *
(g).................... Reconciliation of
changes in ALLL or
ACL, as
applicable.\6\
* * * * * * *
------------------------------------------------------------------------
\1\ Table 5 to Sec. 3.173 does not cover equity exposures, which
should be reported in Table 9.
* * * * * * *
\6\ The reconciliation should include the following: A description of
the allowance; the opening balance of the allowance; charge-offs taken
against the allowance during the period; amounts provided (or
reversed) for estimated probable loan losses during the period; any
other adjustments (for example, exchange rate differences, business
combinations, acquisitions and disposals of subsidiaries), including
transfers between allowances; and the closing balance of the
allowance. Charge-offs and recoveries that have been recorded directly
to the income statement should be disclosed separately.
* * * * *
0
9. Section 3.301 is added to read as follows:
Sec. 3.301 Current expected credit losses (CECL) transition.
(a) CECL transition provision--(1) A national bank or Federal
savings association may elect to use a CECL transition provision
pursuant to this section only if the national bank or Federal savings
association records a reduction in retained earnings due to the
adoption of CECL as of the beginning of the fiscal year in which the
national bank or Federal savings association adopts CECL.
(2) A national bank or Federal savings association that elects to
use the CECL transition provision must use the CECL transition
provision in the first Call Report that includes CECL filed by the
national bank or Federal savings association after it adopts CECL.
(3) A national bank or Federal savings association that does not
elect to use the CECL transition provision as of the first Call Report
that includes CECL filed as described in paragraph (a)(2) of this
section may not elect to use the CECL transition provision in
subsequent reporting periods.
(b) Definitions. For purposes of this section, the following
definitions apply:
(1) Transition period means the three-year period (twelve quarters)
beginning the first day of the fiscal year in which a national bank or
Federal savings association adopts CECL.
(2) CECL transitional amount means the decrease net of any DTAs in
the amount of a national bank's or Federal savings association's
retained earnings as of the beginning of the fiscal year in which the
national bank or Federal savings association adopts CECL from the
amount of the national bank's or Federal savings association's retained
earnings as of the closing of the fiscal year-end immediately prior to
the national bank's or Federal savings association's adoption of CECL.
(3) DTA transitional amount means the increase in the amount of a
national bank's or Federal savings association's DTAs arising from
temporary differences as of the beginning of the fiscal year in which
the national bank or Federal savings association adopts CECL from the
amount of the national bank's or Federal savings association's DTAs
arising from temporary differences as of the closing of the fiscal
year-end immediately prior to the national bank's or Federal savings
association's adoption of CECL.
(4) ACL transitional amount means the difference in the amount of a
national bank's or Federal savings association's ACL as of the
beginning of the fiscal year in which the national bank or Federal
savings association adopts CECL and the amount of the national bank's
or Federal savings association's ALLL as of the closing of the fiscal
year-end immediately prior to the national bank's or Federal savings
association's adoption of CECL.
(5) Eligible credit reserves transitional amount means the increase
in the amount of a national bank's or Federal savings association's
eligible credit reserves as of the beginning of the fiscal year in
which the national bank or Federal savings association adopts CECL
[[Page 22328]]
from the amount of the national bank's or Federal savings association's
eligible credit reserves as of the closing of the fiscal year-end
immediately prior to the national bank's or Federal savings
association's adoption of CECL.
(c) Calculation of CECL transition provision. (1) For purposes of
the election described in paragraph (a)(1) of this section, a national
bank or Federal savings association must make the following adjustments
in its calculation of regulatory capital ratios:
(i) Increase retained earnings by seventy-five percent of its CECL
transitional amount during the first year of the transition period,
increase retained earnings by fifty percent of its CECL transitional
amount during the second year of the transition period, and increase
retained earnings by twenty-five percent of its CECL transitional
amount during the third year of the transition period;
(ii) Decrease amounts of DTAs arising from temporary differences by
seventy-five percent of its DTA transitional amount during the first
year of the transition period, decrease amounts of DTAs arising from
temporary differences by fifty percent of its DTA transitional amount
during the second year of the transition period, and decrease amounts
of DTAs arising from temporary differences by twenty-five percent of
its DTA transitional amount during the third year of the transition
period;
(iii) Decrease amounts of ACL by seventy-five percent of its ACL
transitional amount during the first year of the transition period,
decrease amounts of ACL by fifty percent of its ACL transitional amount
during the second year of the transition period, and decrease amounts
of ACL by twenty-five percent of its ACL transitional amount during the
third year of the transition period; and
(iv) Increase average total consolidated assets as reported on the
Call Report for purposes of the leverage ratio by seventy-five percent
of its CECL transitional amount during the first year of the transition
period, increase average total consolidated assets as reported on the
Call Report for purposes of the leverage ratio by fifty percent of its
CECL transitional amount during the second year of the transition
period, and increase average total consolidated assets as reported on
the Call Report for purposes of the leverage ratio twenty-five percent
of its CECL transitional amount during the third year of the transition
period.
(2) For purposes of the election described in paragraph (a)(1) of
this section, an advanced approaches national bank or Federal savings
association must make the following additional adjustments to its
calculation of regulatory capital ratios:
(i) Increase total leverage exposure for purposes of the
supplementary leverage ratio by seventy-five percent of its CECL
transitional amount during the first year of the transition period,
increase total leverage exposure for purposes of the supplementary
leverage ratio by fifty percent of its CECL transitional amount during
the second year of the transition period, and increase total leverage
exposure for purposes of the supplementary leverage ratio by twenty-
five percent of its CECL transitional amount during the third year of
the transition period; and
(ii) An advanced approaches national bank or Federal savings
association that has completed the parallel run process and that has
received notification from the OCC pursuant to Sec. 3.121(d) must
decrease amounts of eligible credit reserves by seventy-five percent of
its eligible credit reserves transitional amount during the first year
of the transition period, decrease amounts of eligible credit reserves
by fifty percent of its eligible credit reserves transitional amount
during the second year of the transition provision, and decrease
amounts of eligible credit reserves by twenty-five percent of its
eligible credit reserves transitional amount during the third year of
the transition period.
(3) A national bank or Federal savings association that has
completed the parallel run process and that has received notification
from the OCC pursuant to Sec. 3.121(d), and whose amount of expected
credit loss exceeded its eligible credit reserves immediately prior to
the adoption of CECL, and that this has an increase in common equity
tier 1 capital as of the beginning of the fiscal year in which it
adopts CECL after including the first year portion of the CECL
transitional amount must decrease its CECL transitional amount used in
paragraph (c) of this section by the full amount of its DTA
transitional amount.
(4) Notwithstanding any other requirement in this section, for
purposes of this paragraph (c)(4), in the event of a business
combination involving a national bank or Federal savings association
where one or both of the national bank or Federal savings association
have elected the treatment described in this section:
(i) If the acquirer national bank or Federal savings association
(as determined under GAAP) elected the treatment described in this
section, the acquirer national bank or Federal savings association must
continue to use the transitional amounts (unaffected by the business
combination) that it calculated as of the date that it adopted CECL
through the end of its transition period.
(ii) If the acquired insured depository institution (as determined
under GAAP) elected the treatment described in this section, any
transitional amount of the acquired insured depository institution does
not transfer to the resulting national bank or Federal savings
association.
PART 5--RULES, POLICIES, AND PROCEDURES FOR CORPORATE ACTIVITIES
0
10. The authority citation for part 5 continues to read as follows:
Authority: 12 U.S.C. 1 et seq., 24a, 93a, 215a-2, 215a-3, 481,
1462a, 1463, 1464, 2901 et seq., 3907, and 5412(b)(2)(B).
0
11. Section 5.3 is amended by revising paragraph (e)(2) to read as
follows:
Sec. 5.3 Definitions.
* * * * *
(e) * * *
(2) The balance of a national bank's or Federal savings
association's allowance for loan and lease losses or allowance for
credit losses, as applicable, not included in the bank's Tier 2
capital, for purposes of the calculation of risk-based capital
described in paragraph (e)(1) of this section, as reported in the Call
Report.
* * * * *
0
12. Section 5.37 is amended by revising paragraph (c)(3)(ii) to read as
follows:
Sec. 5.37 Investment in national bank or Federal savings association
premises.
* * * * *
(c) * * *
(3) * * *
(ii) The balance of a national bank's or Federal savings
association's allowance for loan and lease losses or allowance for
credit losses, as applicable, not included in the bank's Tier 2
capital, for purposes of the calculation of risk-based capital
described in paragraph (c)(3)(i) of this section, as reported in the
Call Report.
* * * * *
PART 23--LEASING
0
13. The authority citation for part 23 continues to read as follows:
Authority: 12 U.S.C. 1 et seq., 24(Seventh), 24(Tenth), and 93a.
0
14. Section 23.2 is amended by revising paragraph (b)(2) to read as
follows:
Sec. 23.2 Definitions.
* * * * *
[[Page 22329]]
(b) * * *
(2) The balance of a bank's allowance for loan and lease losses or
allowance for credit losses, as applicable, not included in the bank's
Tier 2 capital, for purposes of the calculation of risk-based capital
described in paragraph (b)(1) of this section, as reported in the
bank's Call Report.
* * * * *
PART 24--COMMUNITY AND ECONOMIC DEVELOPMENT ENTITIES, COMMUNITY
DEVELOPMENT PROJECTS, AND OTHER PUBLIC WELFARE INVESTMENTS
0
15. The authority citation for part 24 continues to read as follows:
Authority: 12 U.S.C. 24(Eleventh), 93a, 481 and 1818.
0
16. Section 24.2 is amended by revising paragraph (b)(2) to read as
follows:
Sec. 24.2 Definitions.
* * * * *
(b) * * *
(2) The balance of a bank's allowance for loan and lease losses or
allowance for credit losses, as applicable, not included in the bank's
Tier 2 capital, for purposes of the calculation of risk-based capital
described in paragraph (b)(1) of this section, as reported in the
bank's Call Report.
* * * * *
PART 32--LENDING LIMITS
0
17. The authority citation for part 32 continues to read as follows:
Authority: 12 U.S.C. 1 et seq., 12 U.S.C. 84, 93a, 1462a, 1463,
1464(u), 5412(b)(2)(B), and 15 U.S.C. 1639h.
0
18. Section 32.2 is amended by revising paragraph (c)(2) to read as
follows:
Sec. 32.2 Definitions.
* * * * *
(c) * * *
(2) The balance of a national bank's or savings association's
allowance for loan and lease losses or allowance for credit losses, as
applicable, not included in the bank's Tier 2 capital, for purposes of
the calculation of risk-based capital described in paragraph (c)(1) of
this section, as reported in the bank's Call Report.
* * * * *
PART 34--REAL ESTATE LENDING AND APPRAISALS
0
19. The authority citation for part 32 continues to read as follows:
Authority: 12 U.S.C. 1 et seq., 25b, 29, 93a, 371, 1462a, 1463,
1464, 1465, 1701j-3, 1828(o), 3331 et seq., 5101 et seq., and
5412(b)(2)(B) and 15 U.S.C. 1639h.
0
20. Section 34.81 is amended by revising paragraph (a)(2) to read as
follows:
Sec. 34.81 Definitions.
(a) * * *
(2) The balance of a bank's allowance for loan and lease losses or
allowance for credit losses, as applicable, not included in the bank's
Tier 2 capital, for purposes of the calculation of risk-based capital
described in paragraph (a)(1) of this section, as reported in the
bank's Call Report.
* * * * *
PART 46--ANNUAL STRESS TEST
0
21. The authority citation for part 46 continues to read as follows:
Authority: 12 U.S.C. 93a; 1463(a)(2); 5365(i)(2); and
5412(b)(2)(B).
Sec. 46.8 [Amended]
0
22. Section 46.8 is amended by removing the phrase ``loan and lease''
and adding in its place ``credit'' wherever that phrase appears.
Board of Governors of the Federal Reserve System
12 CFR Chapter II
Authority and Issuance
For the reasons set forth in the preamble, chapter II of title 12
of the Code of Federal Regulations is proposed to be amended as
follows:
PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL
RESERVE SYSTEM (REGULATION H)
0
23. The authority citation for part 208 continues to read as follows:
Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-
338a, 371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9),
1833(j), 1828(o), 1831, 1831o, 1831p-1, 1831r-1, 1831w, 1831x,
1835a, 1882, 2901-2907, 3105, 3310, 3331-3351, 3905-3909, and 5371;
15 U.S.C. 78b, 78I(b), 78l(i), 780-4(c)(5), 78q, 78q-1, and 78w,
1681s, 1681w, 6801, and 6805; 31 U.S.C. 5318; 42 U.S.C. 4012a,
4104a, 4104b, 4106 and 4128.
0
24. In Sec. 208.2, paragraph (d) is revised to read as follows:
Sec. 208.2 Definitions.
* * * * *
(d) Capital stock and surplus means, unless otherwise provided in
this part, or by statute:
(1) Tier 1 and tier 2 capital included in a member bank's risk-
based capital (as defined in Sec. 217.2 of this chapter); and
(2) The balance of a member bank's allowance for loan and lease
losses or allowance for credit losses, as applicable, not included in
its tier 2 capital for calculation of risk-based capital, based on the
bank's most recent Report of Condition and Income filed under 12 U.S.C.
324.
* * * * *
PART 211--INTERNATIONAL BANKING OPERATIONS (REGULATION K)
0
25. The authority citation for part 211 continues to read as follows:
Authority: 12 U.S.C. 221 et seq., 1818, 1835a,1841 et seq.,
3101 et seq., 3901 et seq., and 5101 et seq.; 15 U.S.C. 1681s,
1681w, 6801 and 6805.
Subpart A--International Operations of U.S. Banking Organizations
0
26. In Sec. 211.2, revise paragraph (c)(1) to read as follows:
Sec. 211.2 Definitions.
* * * * *
(c) Capital and surplus means, unless otherwise provided in this
part:
(1) For organizations subject to 12 CFR part 217 (Regulation Q):
(i) Tier 1 and tier 2 capital included in an organization's risk-
based capital (under Regulation Q); and
(ii) The balance of allowance for loan and lease losses or
allowance for credit losses, as applicable, not included in an
organization's tier 2 capital for calculation of risk-based capital,
based on the organization's most recent consolidated Report of
Condition and Income.
* * * * *
Subpart D--International Lending Supervision
0
27. In Sec. 211.43, revise paragraph (c)(4) to read as follows:
Sec. 211.43 Allocated transfer risk reserve.
* * * * *
(c) * * *
(4) Alternative accounting treatment. A banking institution is not
required to establish an ATRR if it writes down in the period in which
the ATRR is required, or has written down in prior periods, the value
of the specified international assets in the requisite amount for each
such asset. For purposes of this paragraph (c)(4), international assets
may be written down by a charge to the Allowance for Loan and Lease
Losses or the allowance for credit losses, as applicable, to the
[[Page 22330]]
extent permitted under U.S. generally accepted accounting principles,
or a reduction in the principal amount of the asset by application of
interest payments or other collections on the asset. However, the
Allowance for Loan and Lease Losses or allowance for credit losses, as
applicable, must be replenished in such amount necessary to restore it
to a level which adequately provides for the estimated losses inherent
in the banking institution's loan portfolio.
* * * * *
PART 215--LOANS TO EXECUTIVE OFFICERS, DIRECTORS, AND PRINCIPAL
SHAREHOLDERS OF MEMBER BANKS (REGULATION O)
0
28. The authority citation for part 215 continues to read as follows:
Authority: 12 U.S.C. 248(a), 375a(10), 375b(9) and (10), 1468,
1817(k), 5412; and Pub. L. 102-242, 105 Stat. 2236 (1991).
0
29. In Sec. 215.2, revise paragraph (i)(2) to read as follows:
Sec. 215.2 Definitions.
* * * * *
(i) * * *
(2) The balance of the bank's allowance for loan and lease losses
or allowance for credit losses, as applicable, not included in the
bank's tier 2 capital for purposes of the calculation of risk-based
capital under the capital rules of the appropriate Federal banking
agency, based on the bank's most recent consolidated reports of
condition filed under 12 U.S.C. 1817(a)(3).
* * * * *
PART 217--CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND
LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q)
0
30. The authority citation for part 217 continues to read as follows:
Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a,
1818, 1828, 1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1851, 3904,
3906-3909, 4808, 5365, 5368, 5371.
0
31. In Sec. 217.2:
0
a. Add the definition of Allowance for credit losses (ACL) in
alphabetical order;
0
b. Revise the definition of Carrying value;
0
c. Add the definition of Current expected credit losses (CECL) in
alphabetical order; and
0
d. Revise the definition of Eligible credit reserves and paragraph (2)
of the definition of Standardized total risk-weighted assets.
The additions and revisions read as follows:
Sec. 217.2 Definitions.
* * * * *
Allowance for credit losses (ACL) means, with respect to a Board-
regulated institution that has adopted CECL, valuation allowances that
have been established through a charge against earnings or retained
earnings for expected credit losses on financial assets measured at
amortized cost and a lessor's net investment in leases that have been
established to reduce the amortized cost basis of the assets to amounts
expected to be collected as determined in accordance with GAAP. For
purposes of this part, allowance for credit losses includes allowances
for expected credit losses on off-balance sheet credit exposures not
accounted for as insurance as determined in accordance with GAAP.
Allowance for credit losses excludes ``allocated transfer risk
reserves'' and allowances created that reflect credit losses on
purchased credit-deteriorated assets and available-for-sale debt
securities.
* * * * *
Carrying value means, with respect to an asset, the value of the
asset on the balance sheet of a Board-regulated institution as
determined in accordance with GAAP. For all assets other than
available-for-sale debt securities or purchased credit-deteriorated
assets, the carrying value is not reduced by any associated credit loss
allowance that is determined in accordance with GAAP.
* * * * *
Current expected credit losses (CECL) means the current expected
credit losses methodology under GAAP.
* * * * *
Eligible credit reserves means:
(1) For a Board-regulated institution that has not adopted CECL,
all general allowances that have been established through a charge
against earnings to cover estimated credit losses associated with on-
or off-balance sheet wholesale and retail exposures, including the ALLL
associated with such exposures, but excluding allocated transfer risk
reserves established pursuant to 12 U.S.C. 3904 and other specific
reserves created against recognized losses; and
(2) For a Board-regulated institution that has adopted CECL, all
general allowances that have been established through a charge against
earnings or retained earnings to cover expected credit losses
associated with on- or off-balance sheet wholesale and retail
exposures, including ACL associated with such exposures. Eligible
credit reserves exclude allocated transfer risk reserves established
pursuant to 12 U.S.C. 3904, allowances that reflect credit losses on
purchased credit-deteriorated assets and available-for-sale debt
securities, and other specific reserves created against recognized
losses.
* * * * *
Standardized total risk-weighted assets * * *
(2) Any amount of the Board-regulated institution's allowance for
loan and lease losses or allowance for credit losses, as applicable,
that is not included in tier 2 capital and any amount of ``allocated
transfer risk reserves.''
* * * * *
Sec. 217.10 [Amended]
0
32. In Sec. 217.10(c)(3)(ii)(A), remove the words ``allowance for loan
and lease losses'' and add in their place the words ``allowance for
loan and lease losses or allowance for credit losses, as applicable,''.
Sec. Sec. 217.20(d)(3), 217.22, and 217.124 [Amended]
0
33. In Sec. Sec. 217.20, 217.22, and 217.124, remove ``ALLL''
everywhere it appears and add in its place ``ALLL or ACL, as
applicable,''.
Sec. 217.63 [Amended]
0
34. In Table 5 to Sec. 217.63, remove ``allowance for loan and lease
losses,'' and ``allowance for loan and lease losses'' and add in their
place ``allowance for loan and lease losses or allowance for credit
losses, as applicable,'' and remove ``ALLL'' and add in its place
``ALLL or ACL, as applicable''.
0
35. Amend Sec. 217.173 as follows:
0
a. In Table 2, add paragraph (e);
0
b. In Table 3, revise paragraph (e), redesignate paragraph (f) as
paragraph (g), and add a new paragraph (f); and
0
c. In Table 5, revise paragraphs (a), (e), and (g).
The additions and revisions read as follows:
Sec. 217.173 Disclosures by certain advanced approaches Board-
regulated institutions.
* * * * *
[[Page 22331]]
Table 2 to Sec. 217.173--Capital Structure
------------------------------------------------------------------------
------------------------------------------------------------------------
* * * * * * *
(e).................... (1) Whether the Board-
regulated institution
has elected to phase
in recognition of the
transitional amounts
as defined in Sec.
217.300(f).
(2) The Board-
regulated
institution's common
equity tier 1
capital, tier 1
capital, and total
capital without
including the
transitional amounts
as defined in Sec.
217.300(f).
------------------------------------------------------------------------
Table 3 to Sec. 217.173--Capital Adequacy
------------------------------------------------------------------------
------------------------------------------------------------------------
* * * * * * *
(e).................... (1) Common equity tier
1, tier 1 and total
risk-based capital
ratios reflecting the
transition provisions
described in Sec.
217.300(f):
(A) For the top
consolidated group;
and
(2) For each
depository
institution
subsidiary.
(f).................... Common equity tier 1,
tier 1 and total risk-
based capital ratios
reflecting the full
adoption of CECL:
(1) For the top
consolidated group;
and
(2) For each
depository
institution
subsidiary.
* * * * * * *
------------------------------------------------------------------------
* * * * *
Table 5 \1\ to Sec. 217.173--Credit Risk: General Disclosures
------------------------------------------------------------------------
------------------------------------------------------------------------
Qualitative disclosures (a).................... The general
qualitative
disclosure
requirement with
respect to credit
risk (excluding
counterparty credit
risk disclosed in
accordance with Table
7 to Sec. 217.173),
including:
(1) Policy for
determining past due
or delinquency
status;
(2) Policy for placing
loans on nonaccrual;
(3) Policy for
returning loans to
accrual status;
(4) Definition of and
policy for
identifying impaired
loans (for financial
accounting purposes);
(5) Description of the
methodology that the
entity uses to
estimate its
allowance for loan
and lease losses or
allowance for credit
losses, as
applicable, including
statistical methods
used where
applicable;
(6) Policy for
charging-off
uncollectible
amounts; and
(7) Discussion of the
Board-regulated
institution's credit
risk management
policy.
* * * * * * *
(e).................... By major industry or
counterparty type:
(1) Amount of impaired
loans for which there
was a related
allowance under GAAP;
(2) Amount of impaired
loans for which there
was no related
allowance under GAAP;
(3) Amount of loans
past due 90 days and
on nonaccrual;
(4) Amount of loans
past due 90 days and
still accruing; \4\
(5) The balance in the
allowance for loan
and lease losses or
allowance for credit
losses, as
applicable, at the
end of each period,
disaggregated on the
basis of the entity's
impairment method. To
disaggregate the
information required
on the basis of
impairment
methodology, an
entity shall
separately disclose
the amounts based on
the requirements in
GAAP; and
(6) Charge-offs during
the period.
* * * * * * *
(g).................... Reconciliation of
changes in ALLL or
ACL, as
applicable.\6\
* * * * * * *
------------------------------------------------------------------------
\1\ Table 5 to Sec. 217.173 does not cover equity exposures, which
should be reported in Table 9.
* * * * * * *
\4\ A Board-regulated institution is encouraged also to provide an
analysis of the aging of past-due loans.
* * * * * * *
\6\ The reconciliation should include the following: a description of
the allowance; the opening balance of the allowance; charge-offs taken
against the allowance during the period; amounts provided (or
reversed) for estimated probable loan losses during the period; any
other adjustments (for example, exchange rate differences, business
combinations, acquisitions and disposals of subsidiaries), including
transfers between allowances; and the closing balance of the
allowance. Charge-offs and recoveries that have been recorded directly
to the income statement should be disclosed separately.
* * * * *
0
36. Add Sec. 217.301 to read as follows:
Sec. 217.301 Current expected credit losses (CECL) transition.
(a) CECL transition provision--(1) A Board-regulated institution
may elect to use a CECL transition provision pursuant to this section
only if the Board-regulated institution records a reduction in retained
earnings due to the adoption of CECL as of the beginning of the fiscal
year in which the
[[Page 22332]]
Board-regulated institution adopts CECL.
(2) A Board-regulated institution that elects to use the CECL
transition provision must use the CECL transition provision in the
first Call Report or FR Y-9C that includes CECL filed by the Board-
regulated institution after it adopts CECL.
(3) A Board-regulated institution that does not elect to use the
CECL transition provision as of the first Call Report or FR Y-9C that
includes CECL filed as described in paragraph (a)(2) of this section
may not elect to use the CECL transition provision in subsequent
reporting periods.
(b) Definitions. For purposes of this section, the following
definitions apply:
(1) Transition period means the three-year period (twelve quarters)
beginning the first day of the fiscal year in which a Board-regulated
institution adopts CECL.
(2) CECL transitional amount means the decrease net of any DTAs in
the amount of a Board-regulated institution's retained earnings as of
the beginning of the fiscal year in which the Board-regulated
institution adopts CECL from the amount of the Board-regulated
institution's retained earnings as of the closing of the fiscal year-
end immediately prior to the Board-regulated institution's adoption of
CECL.
(3) DTA transitional amount means the increase in the amount of a
Board-regulated institution's DTAs arising from temporary differences
as of the beginning of the fiscal year in which the Board-regulated
institution adopts CECL from the amount of the Board-regulated
institution's DTAs arising from temporary differences as of the closing
of the fiscal year-end immediately prior to the Board-regulated
institution's adoption of CECL.
(4) ACL transitional amount means the difference in the amount of a
Board-regulated institution's ACL as of the beginning of the fiscal
year in which the Board-regulated institution adopts CECL and the
amount of the Board-regulated institution's ALLL as of the closing of
the fiscal year-end immediately prior to the Board-regulated
institution's adoption of CECL.
(5) Eligible credit reserves transitional amount means the increase
in the amount of a Board-regulated institution's eligible credit
reserves as of the beginning of the fiscal year in which the Board-
regulated institution adopts CECL from the amount of the Board-
regulated institution's eligible credit reserves as of the closing of
the fiscal year-end immediately prior to the Board-regulated
institution's adoption of CECL.
(c) Calculation of CECL transition provision. (1) For purposes of
the election described in paragraph (a)(1) of this section, a Board-
regulated institution must make the following adjustments in its
calculation of regulatory capital ratios:
(i) Increase retained earnings by seventy-five percent of its CECL
transitional amount during the first year of the transition period,
increase retained earnings by fifty percent of its CECL transitional
amount during the second year of the transition period, and increase
retained earnings by twenty-five percent of its CECL transitional
amount during the third year of the transition period;
(ii) Decrease amounts of DTAs arising from temporary differences by
seventy-five percent of its DTA transitional amount during the first
year of the transition period, decrease amounts of DTAs arising from
temporary differences by fifty percent of its DTA transitional amount
during the second year of the transition period, and decrease amounts
of DTAs arising from temporary differences by twenty-five percent of
its DTA transitional amount during the third year of the transition
period;
(iii) Decrease amounts of ACL by seventy-five percent of its ACL
transitional amount during the first year of the transition period,
decrease amounts of ACL by fifty percent of its ACL transitional amount
during the second year of the transition period, and decrease amounts
of ACL by twenty-five percent of its ACL transitional amount during the
third year of the transition period; and
(iv) Increase average total consolidated assets as reported on the
Call Report or FR Y-9C for purposes of the leverage ratio by seventy-
five percent of its CECL transitional amount during the first year of
the transition period, increase average total consolidated assets as
reported on the Call Report or FR Y-9C for purposes of the leverage
ratio by fifty percent of its CECL transitional amount during the
second year of the transition period, and increase average total
consolidated assets as reported on the Call Report or FR Y-9C for
purposes of the leverage ratio twenty-five percent of its CECL
transitional amount during the third year of the transition period.
(2) For purposes of the election described in paragraph (a)(1) of
this section, an advanced approaches Board-regulated institution must
make the following additional adjustments to its calculation of
regulatory capital ratios:
(i) Increase total leverage exposure for purposes of the
supplementary leverage ratio by seventy-five percent of its CECL
transitional amount during the first year of the transition period,
increase total leverage exposure for purposes of the supplementary
leverage ratio by fifty percent of its CECL transitional amount during
the second year of the transition period, and increase total leverage
exposure for purposes of the supplementary leverage ratio by twenty-
five percent of its CECL transitional amount during the third year of
the transition period; and
(ii) An advanced approaches Board-regulated institution that has
completed the parallel run process and has received notification from
the Board pursuant to Sec. 217.121(d) must decrease amounts of
eligible credit reserves by seventy-five percent of its eligible credit
reserves transitional amount during the first year of the transition
period, decrease amounts of eligible credit reserves by fifty percent
of its eligible credit reserves transitional amount during the second
year of the transition provision, and decrease amounts of eligible
credit reserves by twenty-five percent of its eligible credit reserves
transitional amount during the third year of the transition period.
(3) An advanced approaches Board-regulated institution that has
completed the parallel run process and has received notification from
the Board pursuant to Sec. 217.121(d), whose amount of expected credit
loss exceeded its eligible credit reserves immediately prior to the
adoption of CECL, and that has an increase in common equity tier 1
capital as of the beginning of the fiscal year in which it adopts CECL
after including the first year portion of the CECL transitional amount
must decrease its CECL transitional amount used in paragraph (c) of
this section by the full amount of its DTA transitional amount.
(4) Notwithstanding any other requirement in this section, for
purposes of this paragraph (c)(4), in the event of a business
combination involving Board-regulated institutions where one or both
Board-regulated institutions have elected the treatment described in
this section:
(i) If the acquirer Board-regulated institution (as determined
under GAAP) elected the treatment described in this section, the
acquirer Board-regulated institution must continue to use the
transitional amounts (unaffected by the business combination) that it
calculated as of the date that it adopted CECL through the end of its
transition period.
(ii) If the acquired company (as determined under GAAP) elected the
treatment described in this section, any
[[Page 22333]]
transitional amount of the acquired company does not transfer to the
resulting Board-regulated institution.
PART 223--TRANSACTIONS BETWEEN MEMBER BANKS AND THEIR AFFILIATES
(REGULATION W)
0
37. The authority citation for part 223 continues to read as follows:
Authority: 12 U.S.C. 371c(b)(1)(E), (b)(2)(A), and (f), 371c-
1(e), 1828(j), 1468(a), and section 312(b)(2)(A) of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (12 U.S.C. 5412).
Subpart A--Introduction and Definitions
0
38. In Sec. 223.3, revise paragraph (d) to read as follows:
Sec. 223.3 What are the meanings of the other terms used in sections
23A and 23B and this part?
* * * * *
(d) Capital stock and surplus means the sum of:
(1) A member bank's tier 1 and tier 2 capital under the capital
rules of the appropriate Federal banking agency, based on the member
bank's most recent consolidated Report of Condition and Income filed
under 12 U.S.C. 1817(a)(3);
(2) The balance of a member bank's allowance for loan and lease
losses or allowance for credit losses, as applicable, not included in
its tier 2 capital under the capital rules of the appropriate Federal
banking agency, based on the member bank's most recent consolidated
Report of Condition and Income filed under 12 U.S.C. 1817(a)(3); and
(3) The amount of any investment by a member bank in a financial
subsidiary that counts as a covered transaction and is required to be
deducted from the member bank's capital for regulatory capital
purposes.
* * * * *
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
0
39. The authority citation for part 225 continues to read as follows:
Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-
1831i, 1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351,
3906, 3907 and 3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805.
0
40. In Sec. 225.127:
0
a. Remove ``225.25(b)(6)'' everywhere it appears and add in its place
``225.28(b)(12)'' and remove ``Sec. 225.23'' everywhere it appears and
add in its place ``Sec. 225.23 or Sec. 225.24''; and
0
b. Revise paragraph (h).
The revision reads as follows:
Sec. 225.127 Investments in corporations or projects designed
primarily to promote community welfare.
* * * * *
(h) For purposes of paragraph (f) of this section, five percent of
the total consolidated capital stock and surplus of a bank holding
company includes its total investment in projects described in
paragraph (f) of this section, when aggregated with similar types of
investments made by depository institutions controlled by the bank
holding company. The term total consolidated capital stock and surplus
of the bank holding company means total equity capital and the
allowance for loan and lease losses or allowance for credit losses, as
applicable, based on the bank holding company's most recent FR Y-9C
(Consolidated Financial Statements for Holding Companies) or FR Y-9SP
(Parent Company Only Financial Statements for Small Holding Companies).
PART 252--ENHANCED PRUDENTIAL STANDARDS (REGULATION YY)
0
41. The authority citation for part 252 continues to read as follows:
Authority: 12 U.S.C. 321-338a, 481-486, 1467a, 1818, 1828,
1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1844(c), 3101 et seq.,
3101 note, 3904, 3906-3909, 4808, 5361, 5362, 5365, 5366, 5367,
5368, 5371.
Subpart B--Company-Run Stress Test Requirements for Certain U.S.
Banking Organizations With Total Consolidated Assets Over $10
Billion and Less Than $50 Billion
0
42. In Sec. 252.12, revise paragraph (m) to read as follows:
Sec. 252.12 Definitions.
* * * * *
(m) Provision for credit losses means:
(1) Until December 31, 2019:
(i) With respect to a bank holding company, savings and loan
holding company, or state member bank that has not adopted the current
expected credit losses methodology under U.S. generally accepted
accounting principles (GAAP), the provision for loan and lease losses
as reported on the FR Y-9C (and as would be reported on the FR Y-9C or
Call Report, as appropriate, in the current stress test cycle); and,
(ii) With respect to a bank holding company, savings and loan
holding company, or state member bank that has adopted the current
expected credit losses methodology under GAAP, the provision for loan
and lease losses, as would be calculated and reported on the FR Y-9C or
Call Report, as appropriate, by a bank holding company, savings and
loan holding company, or state member bank that has not adopted the
current expected credit losses methodology under GAAP; and
(2) Beginning January 1, 2020:
(i) With respect to a covered company that has adopted the current
expected credit losses methodology under GAAP, the provision for credit
losses, as would be reported by the bank holding company, savings and
loan holding company, or state member bank on the FR Y-9C or Call
Report, as appropriate, in the current stress test cycle; and
(ii) With respect to a bank holding company, savings and loan
holding company, or state member bank that has not adopted the current
expected credit losses methodology under GAAP, the provision for loan
and lease losses as would be reported by the bank holding company,
savings and loan holding company, or state member bank on the FR Y-9C
or Call Report, as appropriate, in the current stress test cycle.
* * * * *
0
43. In Sec. 252.15, revise paragraphs (a)(1) and (2) to read as
follows:
Sec. 252.15 Methodologies and practices.
(a) * * *
(1) Losses, pre-provision net revenue, provision for credit losses,
and net income; and
(2) The potential impact on the regulatory capital levels and
ratios applicable to the covered bank, and any other capital ratios
specified by the Board, incorporating the effects of any capital action
over the planning horizon and maintenance of an allowance for loan
losses or allowance for credit losses, as appropriate, for credit
exposures throughout the planning horizon.
* * * * *
0
44. In Sec. 252.16, revise paragraph (b)(3) to read as follows:
Sec. 252.16 Reports of stress test results.
* * * * *
(b) * * *
(3) For each quarter of the planning horizon, estimates of
aggregate losses, pre-provision net revenue, provision for credit
losses, net income, and regulatory capital ratios;
* * * * *
0
45. In Sec. 252.17, revise paragraphs (b)(1)(iii)(C), (b)(3)(iii)(C),
and (c)(1) to read as follows:
Sec. 252.17 Disclosure of stress test results.
* * * * *
(b) * * *
(1) * * *
(iii) * * *
[[Page 22334]]
(C) Provision for credit losses;
* * * * *
(3) * * *
(iii) * * *
(C) Provision for credit losses;
* * * * *
(c) * * *
(1) The disclosure of aggregate losses, pre-provision net revenue,
provision for credit losses, and net income that is required under
paragraph (b) of this section must be on a cumulative basis over the
planning horizon.
* * * * *
Subpart E--Supervisory Stress Test Requirements for U.S. Bank
Holding Companies With $50 Billion or More in Total Consolidated
Assets and Nonbank Financial Companies Supervised by the Board
0
46. In Sec. 252.42, revise paragraph (l) to read as follows:
Sec. 252.42 Definitions.
* * * * *
(l) Provision for credit losses means:
(1) Until December 31, 2019:
(i) With respect to a covered company that has not adopted the
current expected credit losses methodology under U.S. generally
accepted accounting principles (GAAP), the provision for loan and lease
losses as reported on the FR Y-9C (and as would be reported on the FR
Y-9C in the current stress test cycle); and
(ii) With respect to a covered company that has adopted the current
expected credit losses methodology under GAAP, the provision for loan
and lease losses, as would be calculated and reported on the FR Y-9C by
a covered company that has not adopted the current expected credit
losses methodology under GAAP; and
(2) Beginning January 1, 2020:
(i) With respect to a covered company that has adopted the current
expected credit losses methodology under GAAP, the provision for credit
losses, as would be reported by the covered company on the FR Y-9C in
the current stress test cycle; and,
(ii) With respect to a covered company that has not adopted the
current expected credit losses methodology under GAAP, the provision
for loan and lease losses as would be reported by the covered company
on the FR Y-9C in the current stress test cycle.
* * * * *
0
47. In Sec. 252.45, revise paragraph (b)(2) to read as follows:
Sec. 252.45 Data and information required to be submitted in support
of the Board's analyses.
* * * * *
(b) * * *
(2) Project a company's pre-provision net revenue, losses,
provision for credit losses, and net income; and pro forma capital
levels, regulatory capital ratios, and any other capital ratio
specified by the Board under the scenarios described in Sec.
252.44(b).
* * * * *
Subpart F--Company-Run Stress Test Requirements for U.S. Bank
Holding Companies With $50 Billion or More in Total Consolidated
Assets and Nonbank Financial Companies Supervised by the Board
0
48. In Sec. 252.52, revise paragraph (m) to read as follows:
Sec. 252.52 Definitions.
* * * * *
(m) Provision for credit losses means:
(1) Until December 31, 2019:
(i) With respect to a covered company that has not adopted the
current expected credit losses methodology under GAAP, the provision
for loan and lease losses as reported on the FR Y-9C (and as would be
reported on the FR Y-9C in the current stress test cycle); and
(ii) With respect to a covered company that has adopted the current
expected credit losses methodology under GAAP, the provision for loan
and lease losses, as would be calculated and reported on the FR Y-9C by
a covered company that has not adopted the current expected credit
losses methodology under GAAP; and
(2) Beginning January 1, 2020:
(i) With respect to a covered company that has adopted the current
expected credit losses methodology under GAAP, the provision for credit
losses, as would be reported by the covered company on the FR Y-9C in
the current stress test cycle; and
(ii) With respect to a covered company that has not adopted the
current expected credit losses methodology under GAAP, the provision
for loan and lease losses as would be reported by the covered company
on the FR Y-9C in the current stress test cycle.
* * * * *
0
49. In Sec. 252.56, revise paragraphs (a)(1) and (2) to read as
follows:
Sec. 252.56 Methodologies and practices.
(a) * * *
(1) Losses, pre-provision net revenue, provision for credit losses,
and net income; and
(2) The potential impact on the regulatory capital levels and
ratios applicable to the covered bank, and any other capital ratios
specified by the Board, incorporating the effects of any capital action
over the planning horizon and maintenance of an allowance for loan
losses or allowance for credit losses, as appropriate, for credit
exposures throughout the planning horizon.
* * * * *
0
50. In Sec. 252.58, revise paragraphs (b)(2), (b)(3)(ii), and
(c)(1)(ii) to read as follows:
Sec. 252.58 Disclosure of stress test results.
* * * * *
(b) * * *
(2) A general description of the methodologies used in the stress
test, including those employed to estimate losses, revenues, provision
for credit losses, and changes in capital positions over the planning
horizon;
(3) * * *
(ii) Provision for credit losses, realized losses or gains on
available-for-sale and held-to-maturity securities, trading and
counterparty losses or gains;
* * * * *
(c) * * *
(1) * * *
(ii) Provision for credit losses, realized losses/gains on
available-for-sale and held-to-maturity securities, trading and
counterparty losses, and other losses or gain;
* * * * *
Federal Deposit Insurance Corporation
12 CFR Chapter III
Authority and Issuance
For the reasons stated in the preamble, the Federal Deposit
Insurance Corporation proposes to amend chapter III of title 12, Code
of Federal Regulations as follows:
PART 324--CAPITAL ADEQUACY OF FDIC-SUPERVISED INSTITUTIONS
0
51. The authority citation for part 324 continues to read as follows:
Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b),
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n),
1828(o), 1831o, 1835, 3907, 3909, 4808; 5371; 5412; Pub. L. 102-233,
105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242,
105 Stat. 2236, 2355, as amended by Pub. L. 103-325, 108 Stat. 2160,
2233 (12 U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386,
as amended by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828
note); Pub. L. 111-203, 124 Stat. 1376, 1887 (15 U.S.C. 78o-7 note).
0
52. Section 324.2 is amended by:
[[Page 22335]]
0
a. Adding the definition of Allowance for credit losses (ACL) in
alphabetical order;
0
b. Revising the definitions of Carrying value;
0
c. Adding the definition of Current expected credit losses (CECL) in
alphabetical order; and
0
d. Revising the definitions of Eligible credit reserves and Identified
losses and paragraph (2) of the definition of Standardized total risk-
weighted assets.
The additions and revisions read as follows:
Sec. 324.2 Definitions.
* * * * *
Allowance for credit losses (ACL) means, with respect to an FDIC-
supervised institution that has adopted CECL, valuation allowances that
have been established through a charge against earnings or retained
earnings for expected credit losses on financial assets measured at
amortized cost and a lessor's net investment in leases that have been
established to reduce the amortized cost basis of the assets to amounts
expected to be collected as determined in accordance with GAAP. For
purposes of this part, allowance for credit losses includes allowances
for expected credit losses on off-balance sheet credit exposures not
accounted for as insurance as determined in accordance with GAAP.
Allowance for credit losses excludes ``allocated transfer risk
reserves'' and allowances created that reflect credit losses on
purchased credit-deteriorated assets and available-for-sale debt
securities.
* * * * *
Carrying value means, with respect to an asset, the value of the
asset on the balance sheet of the FDIC-supervised institution as
determined in accordance with GAAP. For all assets other than
available-for-sale debt securities or purchased credit-deteriorated
assets, the carrying value is not reduced by any associated credit loss
allowance that is determined in accordance with GAAP.
* * * * *
Current expected credit losses (CECL) means the current expected
credit losses methodology under GAAP.
* * * * *
Eligible credit reserves means:
(1) For an FDIC-supervised institution that has not adopted CECL,
all general allowances that have been established through a charge
against earnings to cover estimated credit losses associated with on-
or off-balance sheet wholesale and retail exposures, including the ALLL
associated with such exposures, but excluding allocated transfer risk
reserves established pursuant to 12 U.S.C. 3904 and other specific
reserves created against recognized losses; and
(2) For an FDIC-supervised institution that has adopted CECL, all
general allowances that have been established through a charge against
earnings or retained earnings to cover expected credit losses
associated with on- or off-balance sheet wholesale and retail
exposures, including ACL associated with such exposures. Eligible
credit reserves exclude allocated transfer risk reserves established
pursuant to 12 U.S.C. 3904, allowances that reflect credit losses on
purchased credit-deteriorated assets and available-for-sale debt
securities, and other specific reserves created against recognized
losses.
* * * * *
Identified losses means:
(1) When measured as of the date of examination of an FDIC-
supervised institution, those items that have been determined by an
evaluation made by a state or Federal examiner as of that date to be
chargeable against income, capital and/or general valuation allowances
such as the allowances for loan and lease losses (examples of
identified losses would be assets classified loss, off-balance sheet
items classified loss, any provision expenses that are necessary for
the FDIC-supervised institution to record in order to replenish its
general valuation allowances to an adequate level, liabilities not
shown on the FDIC-supervised institution's books, estimated losses in
contingent liabilities, and differences in accounts which represent
shortages) or the allowance for credit losses; and
(2) When measured as of any other date, those items:
(i) That have been determined--
(A) By an evaluation made by a state or Federal examiner at the
most recent examination of an FDIC-supervised institution to be
chargeable against income, capital and/or general valuation allowances;
or
(B) By evaluations made by the FDIC-supervised institution since
its most recent examination to be chargeable against income, capital
and/or general valuation allowances; and
(ii) For which the appropriate accounting entries to recognize the
loss have not yet been made on the FDIC-supervised institution's books
nor has the item been collected or otherwise settled.
* * * * *
Standardized total risk-weighted assets * * *
(2) Any amount of the FDIC-supervised institution's allowance for
loan and lease losses or allowance for credit losses, as applicable,
that is not included in tier 2 capital and any amount of ``allocated
transfer risk reserves.''
* * * * *
Sec. 324.10 [Amended]
0
53. Section 324.10(c)(3)(ii)(A) is amended by removing the words
``allowance for loan and lease losses'' and adding in their place the
words ``allowance for loan and lease losses or allowance for credit
losses, as applicable,''.
Sec. Sec. 324.20, 324.22, and 324.124 [Amended]
0
54. Sections 324.20, 324.22, and 324.124 are amended by removing
``ALLL'' everywhere it appears and adding in its place ``ALLL or ACL,
as applicable,'', except the second occurrence in Sec. 324.20(d)(3)
and in Sec. 324.124(a) where ``ALLL or ACL, as applicable'' is added
in its place.
Sec. 324.63 [Amended]
0
55. Table 5 to Sec. 324.63 is amended by removing ``allowance for loan
and lease losses,'' and ``allowance for loan and lease losses'' and
adding in their place ``allowance for loan and lease losses or
allowance for credit losses, as applicable,'' and removing ``ALLL'' and
adding in its place ``ALLL or ACL, as applicable''.
0
56. Section 324.173 is amended:
0
a. In Table 2, by adding paragraph (e);
0
b. In Table 3, by revising paragraph (e), redesignating paragraph (f)
as paragraph (g), and adding a new paragraph (f); and
0
c. In Table 5, by revising paragraphs (a), (e), and (g).
The additions and revisions read as follows:
Sec. 324.173 Disclosures by certain advanced approaches FDIC-
supervised institutions.
* * * * *
[[Page 22336]]
Table 2 to Sec. 324.173--Capital Structure
------------------------------------------------------------------------
------------------------------------------------------------------------
* * * * * * *
(e).................... (1) Whether the FDIC-
supervised
institution has
elected to phase in
recognition of the
transitional amounts
as defined in Sec.
324.300(f).
(2) The FDIC-
supervised
institution's common
equity tier 1
capital, tier 1
capital, and total
capital without
including the
transitional amounts
as defined in Sec.
324.300(f).
------------------------------------------------------------------------
Table 3 to Sec. 324.173--Capital Adequacy
------------------------------------------------------------------------
------------------------------------------------------------------------
* * * * * * *
(e).................... (1) Common equity tier
1, tier 1 and total
risk-based capital
ratios reflecting the
transition provisions
described in Sec.
324.300(f):
(A) For the top
consolidated group;
and
(2) For each
depository
institution
subsidiary.
(f).................... Common equity tier 1,
tier 1 and total risk-
based capital ratios
reflecting the full
adoption of CECL:
(1) For the top
consolidated group;
and
(2) For each
depository
institution
subsidiary.
* * * * * * *
------------------------------------------------------------------------
* * * * *
Table 5\1\ to Sec. 324.173--Credit Risk: General Disclosures
------------------------------------------------------------------------
------------------------------------------------------------------------
Qualitative disclosures (a).................... The general
qualitative
disclosure
requirement with
respect to credit
risk (excluding
counterparty credit
risk disclosed in
accordance with Table
7 to Sec. 324.173),
including:
(1) Policy for
determining past due
or delinquency
status;
(2) Policy for placing
loans on nonaccrual;
(3) Policy for
returning loans to
accrual status;
(4) Definition of and
policy for
identifying impaired
loans (for financial
accounting purposes);
(5) Description of the
methodology that the
entity uses to
estimate its
allowance for loan
and lease losses or
allowance for credit
losses, as
applicable, including
statistical methods
used where
applicable;
(6) Policy for
charging-off
uncollectible
amounts; and
(7) Discussion of the
FDIC-supervised
institution's credit
risk management
policy.
* * * * * * *
(e).................... By major industry or
counterparty type:
(1) Amount of impaired
loans for which there
was a related
allowance under GAAP;
(2) Amount of impaired
loans for which there
was no related
allowance under GAAP;
(3) Amount of loans
past due 90 days and
on nonaccrual;
(4) Amount of loans
past due 90 days and
still accruing; \4\
(5) The balance in the
allowance for loan
and lease losses or
allowance for credit
losses, as
applicable, at the
end of each period,
disaggregated on the
basis of the entity's
impairment method. To
disaggregate the
information required
on the basis of
impairment
methodology, an
entity shall
separately disclose
the amounts based on
the requirements in
GAAP; and
(6) Charge-offs during
the period.
* * * * * * *
(g).................... Reconciliation of
changes in ALLL or
ACL, as
applicable.\6\
* * * * * * *
------------------------------------------------------------------------
\1\ Table 5 to Sec. 324.173 does not cover equity exposures, which
should be reported in Table 9 to Sec. 324.173.
* * * * * * *
\4\ An FDIC-supervised institution is encouraged also to provide an
analysis of the aging of past-due loans.
* * * * * * *
\6\ The reconciliation should include the following: A description of
the allowance; the opening balance of the allowance; charge-offs taken
against the allowance during the period; amounts provided (or
reversed) for estimated probable loan losses during the period; any
other adjustments (for example, exchange rate differences, business
combinations, acquisitions and disposals of subsidiaries), including
transfers between allowances; and the closing balance of the
allowance. Charge-offs and recoveries that have been recorded directly
to the income statement should be disclosed separately.
* * * * *
0
57. Add Sec. 324.301 to read as follows:
Sec. 324.301 Current expected credit losses (CECL) transition.
(a) CECL transition provision--(1) An FDIC-supervised institution
may elect to use a CECL transition provision pursuant to this section
only if the FDIC-supervised institution records a reduction in retained
earnings due to the adoption of CECL as of the beginning of the fiscal
year in which the
[[Page 22337]]
FDIC-supervised institution adopts CECL.
(2) An FDIC-supervised institution that elects to use the CECL
transition provision must use the CECL transition provision in the
first Call Report that includes CECL filed by the FDIC-supervised
institution after it adopts CECL.
(3) An FDIC-supervised institution that does not elect to use the
CECL transition provision as of the first Call Report that includes
CECL filed as described in paragraph (a)(2) of this section may not
elect to use the CECL transition provision in subsequent reporting
periods.
(b) Definitions. For purposes of this section, the following
definitions apply:
(1) Transition period means the three-year period (twelve quarters)
beginning the first day of the fiscal year in which an FDIC-supervised
institution adopts CECL.
(2) CECL transitional amount means the decrease net of any DTAs in
the amount of an FDIC-supervised institution's retained earnings as of
the beginning of the fiscal year in which the FDIC-supervised
institution adopts CECL from the amount of the FDIC-supervised
institution's retained earnings as of the closing of the fiscal year-
end immediately prior to the FDIC-supervised institution's adoption of
CECL.
(3) DTA transitional amount means the increase in the amount of an
FDIC-supervised institution's DTAs arising from temporary differences
as of the beginning of the fiscal year in which the FDIC-supervised
institution adopts CECL from the amount of the FDIC-supervised
institution's DTAs arising from temporary differences as of the closing
of the fiscal year-end immediately prior to the FDIC-supervised
institution's adoption of CECL.
(4) ACL transitional amount means the difference in the amount of
an FDIC-supervised institution's ACL as of the beginning of the fiscal
year in which the FDIC-supervised institution adopts CECL and the
amount of the FDIC-supervised institution's ALLL as of the closing of
the fiscal year-end immediately prior to the FDIC-supervised
institution's adoption of CECL.
(5) Eligible credit reserves transitional amount means the increase
in the amount of a FDIC-supervised institution's eligible credit
reserves as of the beginning of the fiscal year in which the FDIC-
supervised institution adopts CECL from the amount of the FDIC-
supervised institution's eligible credit reserves as of the closing of
the fiscal year-end immediately prior to the FDIC-supervised
institution's adoption of CECL.
(c) Calculation of CECL transition provision. (1) For purposes of
the election described in paragraph (a)(1) of this section, an FDIC-
supervised institution must make the following adjustments in its
calculation of regulatory capital ratios:
(i) Increase retained earnings by seventy-five percent of its CECL
transitional amount during the first year of the transition period,
increase retained earnings by fifty percent of its CECL transitional
amount during the second year of the transition period, and increase
retained earnings by twenty-five percent of its CECL transitional
amount during the third year of the transition period;
(ii) Decrease amounts of DTAs arising from temporary differences by
seventy-five percent of its DTA transitional amount during the first
year of the transition period, decrease amounts of DTAs arising from
temporary differences by fifty percent of its DTA transitional amount
during the second year of the transition period, and decrease amounts
of DTAs arising from temporary differences by twenty-five percent of
its DTA transitional amount during the third year of the transition
period;
(iii) Decrease amounts of ACL by seventy-five percent of its ACL
transitional amount during the first year of the transition period,
decrease amounts of ACL by fifty percent of its ACL transitional amount
during the second year of the transition period, and decrease amounts
of ACL by twenty-five percent of its ACL transitional amount during the
third year of the transition period; and
(iv) Increase average total consolidated assets as reported on the
Call Report for purposes of the leverage ratio by seventy-five percent
of its CECL transitional amount during the first year of the transition
period, increase average total consolidated assets as reported on the
Call Report for purposes of the leverage ratio by fifty percent of its
CECL transitional amount during the second year of the transition
period, and increase average total consolidated assets as reported on
the Call Report for purposes of the leverage ratio twenty-five percent
of its CECL transitional amount during the third year of the transition
period.
(2) For purposes of the election described in paragraph (a)(1) of
this section, an advanced approaches FDIC-supervised institution must
make the following additional adjustments to its calculation of
regulatory capital ratios:
(i) Increase total leverage exposure for purposes of the
supplementary leverage ratio by seventy-five percent of its CECL
transitional amount during the first year of the transition period,
increase total leverage exposure for purposes of the supplementary
leverage ratio by fifty percent of its CECL transitional amount during
the second year of the transition period, and increase total leverage
exposure for purposes of the supplementary leverage ratio by twenty-
five percent of its CECL transitional amount during the third year of
the transition period; and
(ii) An advanced approaches FDIC-supervised institution that has
completed the parallel run process and has received notification from
the FDIC pursuant to Sec. 324.121(d) must decrease amounts of eligible
credit reserves by seventy-five percent of its eligible credit reserves
transitional amount during the first year of the transition period,
decrease amounts of eligible credit reserves by fifty percent of its
eligible credit reserves transitional amount during the second year of
the transition provision, and decrease amounts of eligible credit
reserves by twenty-five percent of its eligible credit reserves
transitional amount during the third year of the transition period.
(3) An advanced approaches FDIC-supervised institution that has
completed the parallel run process and has received notification from
the FDIC pursuant to Sec. 324.121(d), whose amount of expected credit
loss exceeded its eligible credit reserves immediately prior to the
adoption of CECL, and that has an increase in common equity tier 1
capital as of the beginning of the fiscal year in which it adopts CECL
after including the first year portion of the CECL transitional amount
must decrease its CECL transitional amount used in paragraph (c) of
this section by the full amount of its DTA transitional amount.
(4) Notwithstanding any other requirement in this section, for
purposes of this paragraph (c)(4), in the event of a business
combination involving FDIC-supervised institutions where one or both
FDIC-supervised institutions have elected the treatment described in
this section:
(i) If the acquirer FDIC-supervised institution (as determined
under GAAP) elected the treatment described in this section, the
acquirer FDIC-supervised institution must continue to use the
transitional amounts (unaffected by the business combination) that it
calculated as of the date that it adopted CECL through the end of its
transition period.
(ii) If the acquired insured depository institution (as determined
under GAAP) elected the treatment described in this
[[Page 22338]]
section, any transitional amount of the acquired insured depository
institution does not transfer to the resulting FDIC-supervised
institution.
PART 325--ANNUAL STRESS TEST
0
58. The authority citation for part 325 continues to read as follows:
Authority: 12 U.S.C. 5365(i)(2); 12 U.S.C. 5412(b)(2)(C); 12
U.S.C. 1818, 12 U.S.C. 1819(a)(Tenth), 12 U.S.C. 1831o, and 12
U.S.C. 1831p-1.
0
59. Section 325.2(g) is revised to read as follows:
Sec. 325.2 Definitions.
* * * * *
(g) Provision for credit losses means:
(1) Until December 31, 2019:
(i) With respect to a state nonmember bank or state savings
association that has not adopted the current expected credit losses
methodology under U.S. generally accepted accounting principles (GAAP),
the provision for loan and lease losses as reported on the Call Report
in the current stress test cycle; and,
(ii) With respect to a state nonmember bank or state savings
association that has adopted the current expected credit losses
methodology under GAAP, the provision for loan and lease losses, as
would be calculated and reported on the Call Report by a state
nonmember bank or state savings association that has not adopted the
current expected credit losses methodology under GAAP; and
(2) Beginning January 1, 2020:
(i) With respect to a state nonmember bank or state savings
association that has adopted the current expected credit losses
methodology under GAAP, the provision for credit losses, as reported in
the Call Report in the current stress test cycle; and
(ii) With respect to a state nonmember bank or state savings
association that has not adopted the current expected credit losses
methodology under GAAP, the provision for loan and lease losses as
would be reported in the Call Report in the current stress test cycle.
* * * * *
0
60. Section 325.5(a)(1) and (2) are revised to read as follows:
Sec. 325.5 Methodologies and practices.
(a) * * *
(1) Pre-provision net revenues, losses, provision for credit
losses, and net income; and
(2) The potential impact on the regulatory capital levels and
ratios applicable to the covered bank, and any other capital ratios
specified by the Corporation, incorporating the effects of any capital
action over the planning horizon and maintenance of an allowance for
loan losses or allowance for credit losses, as appropriate, for credit
exposures throughout the planning horizon.
* * * * *
0
61. Section 325.6(b)(1) is revised to read as follows:
Sec. 325.6 Required reports of stress test results to the FDIC and
the Board of Governors of the Federal Reserve System.
* * * * *
(b) * * *
(1) The reports required under paragraph (a) of this section must
include under the baseline scenario, adverse scenario, severely adverse
scenario and any other scenario required by the FDIC under this part, a
description of the types of risks being included in the stress test, a
summary description of the methodologies used in the stress test, and,
for each quarter of the planning horizon, estimates of aggregate
losses, pre-provision net revenue, provision for credit losses, net
income, and pro forma capital ratios (including regulatory and any
other capital ratios specified by the FDIC). In addition, the report
must include an explanation of the most significant causes for the
changes in regulatory capital ratios and any other information required
by the FDIC.
* * * * *
0
62. Section 325.7 is amended by revising paragraphs (c)(3) and (d)(1)
to read as follows:
Sec. 325.7 Publication of stress test results.
* * * * *
(c) * * *
(3) Estimates of aggregate losses, pre-provision net revenue,
provision for credit losses, net income, and pro forma capital ratios
(including regulatory and any other capital ratios specified by the
FDIC); and
* * * * *
(d) * * *
(1) The disclosure of aggregate losses, pre-provision net revenue,
provisions for credit losses, and net income under this section must be
on a cumulative basis over the planning horizon.
* * * * *
PART 327--ASSESSMENTS
0
63. The authority citation for part 327 continues to read as follows:
Authority: 12 U.S.C. 1441, 1813, 1815, 1817-19, 1821.
Subpart A--In General
Sec. 327.16 [Amended]
0
64. Section 327.16 is amended by removing the words ``allowance for
loan and lease financing receivable losses (ALLL)'' and adding in their
place the words ``allowance for loan and lease financing receivable
losses (ALLL) or allowance for credit losses, as applicable''.
PART 347--INTERNATIONAL BANKING
0
65. The authority citation for part 347 continues to read as follows:
Authority: 12 U.S.C. 1813, 1815, 1817, 1819, 1820, 1828, 3103,
3104, 3105, 3108, 3109; Pub L. 111-203, section 939A, 124 Stat.
1376, 1887 (July 21, 2010) (codified 15 U.S.C. 78o-7 note).
Subpart C--International Lending
0
66. Section 347.303 is amended by revising paragraphs (c)(2) and (4) to
read as follows:
Sec. 347.303 Allocated transfer risk reserve.
* * * * *
(c) * * *
(2) Separate accounting. A banking institution shall account for an
ATRR separately from the Allowance for Loan and Lease Losses or
allowance for credit losses, as applicable, and shall deduct the ATRR
from ``gross loans and leases'' to arrive at ``net loans and lease.''
The ATRR must be established for each asset subject to the ATRR in the
percentage amount specified.
* * * * *
(4) Alternative accounting treatment. A banking institution need
not establish an ATRR if it writes down in the period in which the ATRR
is required, or has written down in prior periods, the value of the
specified international assets in the requisite amount for each such
asset. For purposes of this paragraph (c)(4), international assets may
be written down by a charge to the Allowance for Loan and Lease Losses
or allowance for credit losses, as applicable, or a reduction in the
principal amount of the asset by application of interest payments or
other collections on the asset; provided, that only those international
assets that may be charged to the Allowance for Loan and Lease Losses
or allowance for credit losses, as applicable, pursuant to U.S.
generally accepted accounting principles may be written down by a
charge to the Allowance for Loan and Lease Losses or allowance for
credit losses, as applicable. However, the Allowance for Loan and Lease
Losses or allowance for credit losses, as applicable, must be
replenished in such amount necessary to restore it to a level which
adequately provides for the estimated losses
[[Page 22339]]
inherent in the banking institution's loan and lease portfolio.
* * * * *
PART 390--REGULATIONS TRANSFERRED FROM THE OFFICE OF THRIFT
SUPERVISION
0
67. The authority citation for part 390 continues to read as follows:
Authority: 12 U.S.C. 1819.
Subpart T--Accounting Requirements
Sec. 390.384 [Amended]
0
68. In the appendix to Sec. 390.384, remove ``provision for loan
losses'' everywhere it appears and add in its place ``provision for
loan losses or provision for credit losses, as applicable''.
Dated: April 17, 2018.
Joseph M. Otting,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, April 16, 2018.
Ann E. Misback,
Secretary of the Board.
Dated at Washington, DC this 17th day of April, 2018.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Valerie Best,
Assistant Executive Secretary.
[FR Doc. 2018-08999 Filed 5-11-18; 8:45 am]
BILLING CODE 4810-33-6210-01-6714-01-P
